Last week the fiercely independent Financial Accounting Standards Board agreed to alter a portion of the rules under extreme pressure from the US Congress. The MTM standards have forced many financial institutions to overstate losses on Trillions of US Dollars worth of assets that has intensified the global financial crisis. William M. Isaac, a former chairman of the Federal Deposit Insurance Corp., told a House Financial Services subcommittee hearing on March 12 that “MTM accounting has destroyed well over US$500B of capital in our financial system.
Moreover, since capital can be leveraged about 10 times in making loans, the rules have “destroyed over US$5Tof lending capacity,” said Isaac, now a consultant with the Secura Group of LECG Corp. The problem with Mark-to-Market accounting is that it officially has presumed there’s a functioning market in whatever asset is being valued, and that means a deal between a willing buyer and seller that is not being forced to sell. Actually, no such market exists for many mortgage-backed securities.
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