FASB wants to expand Fair Value to other financial assets. That bears repeating: FASB has published an Exposure Draft that would extend the dubious joys of fair value accounting to ALL financial assets. I so wish I was making this up. On May 26, 2010, FASB published this missive. Fair Value seems to hold a religious (that’s born again, not Presbyterian) fascination for the academic accounting community, which seems astonishingly indifferent to the horrifying role the viciously pro-cyclical fair value process played in the late “Great Recession.” Isn’t the definition of insanity doing something a second time and expecting a different outcome? What are we doing here?
The proposed new rules would require all financial assets, with very few exceptions, to be subject to a mark to market requirement. Banks and other financial institutions would be obliged to mark all loans whether held for sale (which makes some sense) or held to maturity. For loans, the mark would hit Other Consolidated Income (OCI) and put equity on the Fair Value roller coaster.
I’m reminded of that scene in Ghostbusters where that wonky EPA bureaucrat (you can tell he’s a wonky bureaucrat, cause he’s got a beard) orders the boys to shut down the containment grid. Funny in the movies. Sucks in real life.
This will impair credit formation. Full stop. We’ve seen what happens when unmediated fair value accounting takes corporate balance sheets on a pro-cyclical ride. We can’t do it to ourselves a second time, can we? Can we?
OK, here’s what we need to do. Comment on the Exposure Draft. The comment period is open until September. FASB will hold a hearing. Talk to the SEC, FDIC and Fed. Fire up Congressman Paul Kanjorsky again. It’s our bad luck it’s election time and our elected representatives’ attention spans are at cyclical lows, but we need to try. This requires action, or we may get to ride this economy down for the double dip.