It's worth a listen, although according to the Wall Street Journal, much of the reporting on Warren Buffett's comments has failed to pick up on it. Here's the plan.
'In fact, the nationalization of Fannie and Freddie is water over the dam. The men's perspective may be one of pain, but it is historical pain.
Now comes Warren Buffett, a big investor in Wells Fargo, M&T Bank and several other banks, who, during his marathon appearance on CNBC Monday, clearly called for suspension of mark-to-market accounting for regulatory capital purposes.
We add the italics for the benefit of a House hearing tomorrow on this very issue. Mark-to-market accounting is fine for disclosure purposes, because investors are not required to take actions based on it. It's not so fine for regulatory purposes. It doesn't just inform but can dictate actions that make no sense in the circumstances. Banks can be forced to raise capital when capital is unavailable or unduly expensive; regulators can be forced to treat banks as insolvent though their assets continue to perform.
What happens next is exactly what we've seen: Their share prices collapse; government feels obliged to inject taxpayer capital into banks simply to achieve an accounting effect, so banks can meet capital adequacy rules set by, um, government.
(This sounds silly, but has been a big part of government's response so far.)
CNBC, sadly, has been playing a loop of Mr. Buffett's remarks that does a consummate job of leaving out his most important point. Nobody cares about the merits of mark-to-market in the abstract, but how it impacts our current banking crisis. And his exact words were that it is "gasoline on the fire in terms of financial institutions."
Depressing bank stocks today, he said, is precisely the question of whether banks will be "forced to sell stock at ridiculously low prices" to meet the capital adequacy rules.
"If they don't have to sell stock at distressed prices, I think a number of them will do very, very well."
He also proposed a fix, which CNBC duly omitted from its loop, namely to "not have the regulators say, 'We're going to force you to put a lot more capital in based on these mark-to-market figures.'"'
In the overnight lending arena which is where the credit freeze was said to have begun, mark to market accounting would presumably still be in effect. Thus a lender's credit department would still be able to accurately assess the credit worthiness of borrowers. But with the suspension of mark to market accounting for regulatory purposes, regulators would have no grounds for forcing banks to raise capital, which implies that the government would have less reason for pumping in money to capitalize banks.
Buffet is not alone in his thinking. Econlog has a very good analysis of the mark to market rules by economist Jeff Hummel.
'Economists now realize that reserve requirements, designed to make banks more LIQUID, have the unintended reverse impact during a panic, tying up cash that banks need to pay out in order to stem the panic. As a result, reserve requirements are fast disappearing as a tool of bank regulation. Similarly, capital requirements, designed to make banks more SOLVENT, also have the reverse impact during a crisis. What follows is Less's analysis:
"Any discussion of mark-to-market accounting must differentiate between the beneficial effects of honestly reporting assets at what they are actually worth and the destructive impact of inflexible regulations that utilize the principle. Current discussions have blurred the distinction.'
The House Financial Services Committee will hold hearings tomorrow.
'Washington, DC – Congressman Paul E. Kanjorski (D-PA), Chairman of the House Financial Services Subcommittee on Capital Markets, Insurance, and Government Sponsored Enterprises, today announced that the Subcommittee will hold a hearing to examine the mark-to-market accounting rules that many contend have exacerbated the current troubles in the financial industry and in the broader economy. The standard requires companies to value assets they hold at current market values. For assets that are frozen and have a diminished current market value but may recover value in the future, the standard has proven problematic. Companies are then forced to write-down billions in assets, which can lead to further write-downs elsewhere.
“Illiquid markets have resulted in great difficulty in valuing sizable assets. Some have therefore complained about fair value accounting and sought to eliminate it. While companies need stability, investors still need accurate information. We therefore cannot allow for fantasy accounting that wishes away bad assets by merely concealing them,” said Chairman Kanjorski. “As a result, we will seek at this hearing to engage in a constructive, thoughtful conversation with a diverse range of viewpoints aimed at identifying fair-minded, incremental, and achievable fixes to this problem. In short, I want to find a way – within the existing independent standard-setting structure – to still provide investors with the information needed to make effective decisions without continuing to impose undue burdens on financial institutions. Each of our anticipated witnesses will have the opportunity to contribute as we all pursue consensus solutions together to this thorny, contentious issue.”'
In other times I might dredge up some miniscule hope that a solution will be forthcoming. The Committee is chaired by Barney Frank, Democrat from Massachusetts. Democrats complain that our current crisis is the result of laissez faire capitalism. Those in favor of a suspension of mark to market rules see it as a consequence of regulation. Chances that the Committee will recommend easing regulations seem prettly slim, since the opportunity to take over the economy stands before them. Why spoil it by fixing the problem? After all, that would be letting a good crisis go to waste.
