How the regulatory sausage is made, mark-to-market edition

June 3, 2009

Andrew Leonard finds a classic case of the WSJ burying a smoking gun today, in its 2,200-word investigation of the lobbying and maneuvering which caused the FASB’s abolition of mark-to-market rules. 2,100 words in, right at the very end, we find this:

Many saw the new rules as a watering down of standards. That triggered a backlash within FASB. At a meeting of a FASB advisory group in New York on April 28, three of its members threatened to resign in protest, concerned that FASB had jeopardized its credibility.

It would be helpful if the WSJ told us how big the advisory group was, to get a better idea of whether three is a big number. (If it’s this advisory committee, the answer is 13.) But in any case, when the FASB’s own advisors are threatening to resign over a change being pushed through by lobbyists and their bought-and-paid-for lawmakers, you know something pretty smelly is going on.

My feeling is that the problem wasn’t the mark-to-market accounting rules, so much as the sense in government that decisions about recapitalization, nationalization, and other forms of regulatory intervention must all be made based on FASB principles and US GAAP. If we had grown-up regulators who understood the concept of regulatory forbearance when you’re in the middle of a hurricane, there wouldn’t be any need to fiddle the books in this manner — and, for that matter, there wouldn’t have been the horrible shuttering of WaMu, either.

The whole episode is just as tawdry as the WSJ paints it to be, and is ultimately based on the weird idea that FASB rules accurately reflect reality, and that therefore if we change the rules, we must be changing the underlying reality as well. Welcome to Washington, I guess.


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