On Mark-to-Market Congress Advocates Cooking the Books

The trouble with Structured Finance runs deeper than Congress dares to acknowledge.

I have taken off my robe; How can I put it on again?
—Song of Solomon

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You know how, sometimes, it is easier telling a white lie than speaking the truth? Like, for example, when someone asks, "How are you doing?" You respond claiming you are fine when in fact you could be better. Of course, in so doing you are only taking the path of least resistance.

The House Financial Services Subcommittee did much the same today in a hearing evaluating mark-to-market accounting rules, which requires assets be priced at current market values. This soundbite from CNBC summarizes the Congress' objective. Unfortunately, however, it is difficult defending the Congress' action because the path of least resistance representatives are taking involves the telling of something darker than a white lie. Indeed, they should be seen committing an impeachable offense.

The matter of mark-to-market accounting applied to derivative securities having no functioning market in which to trade really boils down to a what came first, the chicken or the egg. Was it the unrestrained promotion of a securities-based financial economy that brought us to this extraordinary moment, or a few bad Bernie Madoffs? Really, that's what it all comes down to. If the cause is the latter, then maybe today's hearing has at least a shred of legitimacy. However, because it is the former, the Congress would do better busying itself righting its own wrong.

The trouble with Structured Finance runs far deeper than issues involving mark-to-market accounting. Rather the entire matter intersects principled objectives stated in the U.S. Constitution's Preamble. Our current financial mess could not have developed were these objectives being met. So, in the case of the chicken and the egg we have a chicken Congress laying its egg on FASB and the SEC, hoping that by changing accounting rules in such a way as effectively amounts to cooking the books, something worthy will hatch. However, with just $15 billion per year in the offing being directed toward new investment in physical economy, odds are the ultimate collapse in confidence Congress rightly wishes to avoid will be delayed only for a brief time.

—Tom Chechatka