Former Securities and Exchange Commission (SEC) Chair Arthur Levitt says fair-value accounting — the mark-to-market rule that forces companies to report the value of assets — should not be undone just because of the credit crisis.
Levitt is dismayed and puzzled that some of the largest banking and financial services trade groups are aggressively lobbying the SEC to suspend the accounting rule, currently in place.
"Accounting sleights-of-hand hid the true risks of assets and liabilities troubled firms were carrying, distorted the markets, and caused investors to lose the confidence necessary for our markets to function properly," Levitt writes in The Wall Street Journal.
Reporting assets at what they are worth allows investors and regulators to see how management is performing, Levitt says.
That knowledge is fundamental to determining whether or not an institution has sufficient capital and liquidity.
"It's like your personal balance sheet," Levitt notes. "If you say everything you own is worth twice as much as it is in today's market, then you are misleading those who are relying on the data you give them, and you will ultimately destroy their trust and willingness to do business with you."
Contrary to what the critics claim, fair value is not liquidation value, Levitt points out.
"It is an accurate reflection of the value of an asset or cost of a liability, and what taxpayers should pay for assets."
Fair value does not make markets more volatile, Levitt says. It makes the risk profile more visible and is the "tough medicine" firms must take in order to restore investor confidence.
Not everyone agrees with Levitt.
First Trust Portfolios chief economist Brian Westbury says that while it's true that the root of the credit crunch was bad mortgage loans, probably 70 percent of the financial crisis today was caused by mark-to-market accounting in an illiquid market, Forbes reports.
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