Banks are fighting against mark-to-market accounting for the value of their assets, and so far they have largely succeeded.
But Nobel laureate Robert Merton, a Harvard economist, believes the banks are wrong.
He, fellow Harvard economist Robert Kaplan, and University of Pennsylvania economist Scott Richard recently wrote an opinion piece in the Financial Times defending mark-to-market accounting.
“They (banks) claim many of their assets are not impaired, that they intend to hold them to maturity anyway and that recent transaction prices reflect distressed sales into an illiquid market, not what the assets are actually worth,” the economists write.
“Legislatures and regulators support these arguments, preferring to conceal depressed asset prices rather than deal with the consequences of insolvent banks,” they note.
“This is not the way forward. While regulators and legislators are keen to find simple solutions to complex problems, allowing financial institutions to ignore market transactions is a bad idea.”
They note that there is no perfect system for valuing complex securities.
“Models can be misused or misinterpreted. But reasonable and auditable methods exist today to incorporate the information in the most recent market prices,” they say.
Myron Scholes, who shared the 1997 Nobel Prize with Merton and is now a hedge fund executive, agrees.
Banks should use mark-to-market accounting or list their complex securities on public exchanges if at all possible, he told Bloomberg.
The public listings would “allow for market discovery and market pricing as much as possible,” Scholes says.
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