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On the Suspension of Mark to Market

[UPDATE]: Allow me to update this piece with this delightful piece of news re the commercial paper market. AT&T can probably survive this for a little while. Plenty of other companies can’t.


One of the items in the proposed bailout that a number of Republicans seem to be insisting on is either a suspension or outright end to mandatory mark to market accounting rules. It is supposed by many people that this will somehow aid the unfreezing of the credit markets and/or provide liquidity to the market. Count me among those who are not so sanguine about the long-term prospects of suspending MTM; in fact, I suspect that it may make the situation worse.

In the very, very short term, the suspension of MTM may help certain companies who have built in balance sheet triggers in contracts, credit agreements, or corporate charters and/or bylaws to avoid immediate catastrophic consequences. But as a systemic matter, the suspension of MTM would seem to inject more uncertainty into the market, which is frankly the very last thing the market needs right during the middle of a crisis of confidence.

To review, the accounting fiascos of 1999-2002 that brought us mandatory MTM accounting taught us that traditional accounting methods make it easier for a company – through “aggressive” accounting – to appear solvent for much longer than the company actually is solvent. Everyone in the lending world remembers this. To further review, a large part of the genesis of the current crisis is a widespread fear that certain assets are toxic, and that it’s impossible to identify the toxic assets from the good ones. So… I guess we’re supposed to assume that allowing a change of accounting rules which leads the credit markets to believe that companies might be (but no way to tell for sure) faking solvency is a good thing?

If we suspend MTM in the current climate, what exactly is supposed to happen? Will companies hire accountants to come in and hastily rewrite their accounting books? If they do, will any lender actually extend them credit without forcing them to crack open the old MTM books instead? And if they can’t force that, will they lend at all? Like I said, the market will go from widespread uncertainty about certain classes assets to having widespread uncertainty about every company, especially in these uncertain times. I fear that this may make the credit markets freeze even tighter than they are, even if we inject a bunch of liquidity into the system.

I suppose there’s a reason why this analysis is completely wrong – and frankly, I hope it’s completely wrong. But I’m just not seeing it at this point.

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