We Don't Need No Stinking Regulation!

We just knew this would happen.  I'm not talking about President Obama's concerns over international regulations on financial institutions (although we'll get to that).  I am talking about something that usually makes normal people doze off: accounting rules.  Accounting rules, when it comes to corporations, are controlled by the Financial Accounting Standards Board (FASB).  For years, they had a rule called "mark-to-market" which means that assets on corporate ledger sheets had to be valued at what market, the least best market, would pay.  

Banks have been having fits over this rule recently, because it has meant that the so-called "toxic assets" were valued as, well, toxic.  Rather, banks wanted to value those assets at mark rather than market.  In other words, what they paid for those assets or what they think, in best case scenario, they could get in the market.  The old FASB rules were essentially realistic, but required banks, therefore, to beef up collateral for Federal regulatory requirements.  If an asset is only worth $100 and the federal regulators require $1000 of collateral, there was a $900 deficit that banks had to find in order to stay in business.  

Today, under enormous pressure from financial institutions and policy makers (read: politicians) who want magic dust spread over this economic and financial mess to make it go away, FASB changed the mark-to-market rules, allowing financial institutions to mark the assets with pie-in-the-sky values.  Voila, an insolvent bank suddenly becomes solvent.  It's like saying a debt you know you will never collect on suddenly looks valuable!  Overnight!  It's magic!  

And dangerous.  It's breathing life into dead bank walking.  But, I guess, those banks don't care because they know (speaking of moral hazard) that the taxpayers will continue to bail them out.  Why?  Because they are "too big to fail!"

Meanwhile, President Obama, at the Group of 20 (G-20) meeting in London, refuses to accede to German and French requests that global leaders begin to think of ways to internationalize regulation of financial institutions.  While President Obama certainly has justifiable concerns about sovereignty issues, it seems to be the failure to institute international regulations defies the "globalized" economy.  

These "too big to fail banks," and even AIG, are all international in scope.  Their tentacles reach into almost every country (isn't there a Citibank branch in Tibet doing sub-prime loans for a yurt?).  AIG's division that created the insurance on the mortgage backed securities (still following me, here?) was based in London.  And then there are the issues of the "off-shore" hedge funds and countries amenable to lax banking regulations which drive business away from prying eyes an into these havens, meanwhile, they fail and cause the same problems we have now.  

I think the Germans and French leaders have justifiable concerns which Americans should not dismiss because of our anathema to international regulation.  Surely there must be ways to address these concerns.

On the other hand, we're still not doing such a great job figuring out how to reign in the financial institutions on our own soil, so maybe we still need to focus on that for awhile.

Note:  Since I wrote this piece Thursday morning, the stock market went up to over 8,000 points before settling in just below that mark.  The reason?  Elation over the new mark-to-market rules.  No offense, but when Wall Street goes ga-ga over an accounting rule, you know it smells bad...right?