Memo to Congress: SEC already has power to abolish mark-to-market

by Kurt Schulzke on September 30, 2008

Fair value accounting is coming under fire, now, from various directions including Newt Gingrich and a number of banks and economists. Apparently, some banks (though not all) think it unfair that Wachovia should be bought for $2.16 billion when it’s balance sheet reports $75.1 billion in net assets.

I suppose this is the question on everyone’s mind: what is the fair value of a bank like Wachovia? I’ve always assumed that it was the price actually agreed by a willing buyer and willing seller in an arm’s length transaction. Maybe Wachovia’s sellers weren’t willing.

Gingrich, by the way, makes a persuasive case for abolishing mark-to-market accounting. He describes it, in so many words, as an accounting principle contrived by litigation-shy accountants to protect themselves against lawsuits. Ouch. But my point is not to discuss the case against mark-to-market.

Rather, I question — with a hat tip to Dane Mott at JP Morgan — the competence of Congress to write this kind of legislation so quickly. Specifically, why did the drafters of this bailout bill include Section 132 which purports to grant to the SEC authority that it already has to “suspend the application” of FASB Statement No. 157, the alleged culprit? The SEC has always had the authority to set accounting standards for public companies. If it wanted to do so, it could probably suspend FASB 157 next week.

It is this kind of drafting faux pas that makes some of us — who know some of the law well — wonder if the people in charge really know what they are doing. If they can make obvious mistakes like this in this corner of the 109 pages what errors are lurking in other corners?