More On How Regulation Has Contributed to the Finacial Crisis

This week my research brought me to a big time professional in the investment world. Sam Zell, national real estate magnate and part owner of the Chicago Cubs, stated that Mark to Market Accounting has had a “massive impact” on the collapse of the financial industry. This supports my contention of the same thing, only this time it’s someone who deals with large sums of money on a daily basis.
Allow me to digress and re-explain this principle. Mark to Market Accounting was instituted in the Sarbanes-Oxley bill which was in reaction to the Enron collapse of several years ago. The attempt was to compel corporations to report their balance sheets on a much tighter time frame. What it did was make compulsory reporting to the IRS on time periods as short as daily what a company’s assets and liabilities were. The problem with this is that when you are dealing with companies with daily transactions as large as AIG and the financial institutions which have now been theoretically bailed out and the day to day fluctuations of market values, it created a situation wherein it was impossible for them to produce accurate and reliable values to their balance sheets. So nearly impossible was it to comply with any degree of certainty that it invited fabrication and invention of figures just to report something to the IRS (which in itself carried great risk). What made the problem so much more difficult to mange and make workable was that so much of the assets and liabilities of these companies is in paper form and the value of these is often as difficult to determine as catching a feather in a tornado.
At this juncture I must digress again to bring the problem to a level that average folks might re to. Let’s imagine that your assets and liabilities is based upon the value of baseball cards. Your gross worth is tied up in baseball cards that you possess and those which you buy and trade daily. The value of collectables of any kind be they classic cars, sports memorabilia (like baseball cards), antiques, art, or even coins, is totally arbitrary and depends upon what the buyer is willing to pay from transaction to transaction (let alone day to day). So if you were forced to report your net value on a daily basis using this as a baseline it would be impossible to reliably report with accuracy.
Having said all of that, it now is incumbent to report that with such a condition being extant, when these companies needed to borrow in order to finance their continued business, prospective borrowers were hesitant to lend simply because under the existing rules it was impossible for them to a reliable balance sheet. And because of this none of them could find a traditional lender which they historically could. I now have to ask that if anyone whose net worth was based on the arbitrary value of baseball cards went to any bank for a loan, what would the likelihood of them receiving it be? The answer obviously is zero.
The really bad news is that few are talking about an extremely ominous fact that lies within this ridiculous and oppressive IRS rule and the subsequent “bailout”. This is that because as long as Mark to Market Accounting remains in place there is no accurate way of placing value on all the “toxic debt” that will now be auctioned off. It could be that the $700 billion is way too much but it is even more likely that it will be too little. Along the way expect reports that some of the values to go on the auction block are inflated. But as long as Mark to Market remains in force this problem will remain.