SEC Ruling Could Help Markets

The Washington Post reports that the Securities and Exchange Commission and the Financial Accounting Standards Board issued a clarification on mark-to-market accounting rules that might help ease the current financial turmoil. The article begins

Some economists are attributing much of the current financial crisis to something as mundane-seeming as accounting.

The Securities and Exchange Commission and the Financial Accounting Standards Board have just made an announcement that, dry as it sounds, may mean a great deal: “When an active market for a security does not exist, the use of management estimates that incorporate current market participant expectations of future cash flows, and include appropriate risk premiums, is acceptable.”

The SEC is not telling holders of hard-hit mortgage-backed securities that they can willy-nilly slap any value on them they want.

What the SEC is saying is: You can take other factors into account when valuing them.

There is no market right now for the worthless mortgage-backed securities — that’s one of the reasons we’re in this crisis. That means financial institutions that are holding them must value them well below their former value, sometimes near zero. That makes the institutions themselves worth much less.

We wrote previously about the mark-to-market accounting rule (the subject of the article referenced above) that may have helped to exacerbate the financial crisis by, in effect, creating the illusion that things are much worse than they really are.

The Competitive Enterprise Institute’s John Berlau believes that scrapping the rule would help markets even more. Representative John Shadegg (R-Arizona) wrote in today’s USA Today that the rule should be suspended and signed a letter with 60-plus lawmakers urging the SEC to suspend the rule. (Press release on letter here; PDF of letter here)

Meanwhile, Harvard economist Jeffrey A. Miron writes the bailout is unnecessary and blames government for the market mess.