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Sunday, January 25, 2009

My friends know that being chronically behind in my reading, I ignore chronological order and read my selected newspapers and magazines in almost random order. This means that on occasion, I can be spotted reading a past issue so old, that it may have turned a bit yellow (the thought of being seen on the train with an "oldie but a goodie" horrifies my wife). Nevertheless, I have no trouble getting into the moment, whether it's now, several months ago, or even more, and I find that it is very interesting to see, with the aid of hindsight, how silly or how insightful were the writings of pundits, editorialists, op ed contributors, etc.

So it was that I finally got around to finishing the main section of the Oct. 11-12 WSJ and found several letters to the editor that agree with my now even more strongly held belief that mark-to-market accounting is killing this economy and the banking system. This is a point that musings readers may be starting to get bored with, but I have to say that rather than feeling any caution about my earlier views, I feel more strongly than ever that the accountants have used the power of their auditing position to trump policy. But let's quote a bit from these letter writers who made the point so simply and directly:

From John B. Woodlief of Charlotte, North Carolina: (Market value accounting) poses great danger to liquidity and lets the most desperate sellers set the price...On Oct. 19, 1987,...Fed Chairman Alan Greenspan asked Chase to provide liquidity to the brokerage industry, as total chaos was unfolding...Such loans would never have been made in today's framework of mark-to-market...The responsibility for liquidity in times of crisis now rests with the government. This is the unintended consequence of letting the accountants set the rules without regard to public policy ramifications...Historical cost accounting has been the bedrock of financial reporting...Collectibility, not marketability, is the prime risk determinant in lending activities. There is no quoted market price for most loans, which are normally based on a private relationship between the bank and its customer."

From Robert M. Gordon, Williamette, ILL.: As a tax lawyer... there is no more contentious issue in tax practice than valuations. It seems dishonest to me to pretend that balance sheets that purport to reflect the 'true' value of assets are any more accurate than those that reflect assets at cost, perhaps adjusted for impairments..."

From Byron Hayes Jr, Los Angeles: "As it stands now, no regulated or public institution can afford to hold a material portfolio of mortgage loans because the mark-to-market rule requires that they be valued as if they were held for sale on a current basis...I believe the private (non government) mortgage lending business will not recover until this rule is changed."

There has been debate about whether the current disaster is a credit crisis or a liquidity crisis. Of course there are elements of both. In our last post, I illustrated the origins of the credit crisis emanating from the horrible, even fraudulent, residential mortgage activity. The liquidity crisis, though, is an accounting phenomenon, caused by the rules requiring accelerated writedowns of loans based on ratings and fictional market prices that force banks and other institutions to amass capital to meet RBC standards. In truth, we have an accounting crisis. In my opinion, most of the large institutions that failed or were forced into merger did not have to be. There did not need to be a TARP, nor a government takeover of Fannie and Freddie (though debunking the GSE's may have been the only positives to come out of this so far). There did need to be a downward adjustment to housing values, probably accompanied by a stock market slump and at least a mild recession, but if historical cost accounting were in place, banking institutions would have had the time to adjust. Yet somehow, there has not been a move to limit the accountants' imposition of balance sheet purity. What will it take?


The Wednesday before last, I returned to Birdland to see the Louis Armstrong Centennial Band again, this time celebrating Saxman Joe Muranyi's 81st birthday. The band outdid themselves, in large part because trombone player/singer Wycliffe Gordon was on the bandstand for both sets. He may be the best young player at his instrument, and he surely is one of the most entertaining and talented jazzmen New Yorkers can see on a regular basis. In true friendly Birdland fashion, a nice piece of birthday cake was distributed to all.

I then stayed for the feature show which was the opening night (of four) for the incredible guitarist Pat Martino, joined in this case by one of the best of the current crop of young tenor players, Eric Alexander. So you got two headliners for the price of one. Pat and his trio play so fast, they usually don't include a horn player, but since they also had Tony Marino on organ for this gig, it was a really special evening, even if it was a strain for Eric (or any horn player) to maintain the pace. As usual, Pat didn't bother introducing or identifying the numbers, so they went right from one song to the next, and we were off to the races again. I can tell you the near capacity crowd really got into the frantic pace. Eric did lay out for one song, a simply beautiful ballad arrangement of Monk's Round Midnight, which may be my favorite song.

Pat has been absent for a while, working on the movie being made about his extraordinary life. More on that as news about its release comes out.


Last Tuesday, I stubbornly bought 300 shares of Carmax (KMX) at 7.99 on the assumption that if there is a market for cars, it is likely to be concentrated in the previously owned arena. We'll see. The next day, I came back for 300 shares of Tomkins (TKS), a British diversification for me, at 6.92. One correction from the last post. BOLT is Bolt Technology, not Electronics.

More of a comment to a previous post but here it is - please explain "mark to market" accounting. Both you and Steve Forbes have spent quite a bit of time railing against this policy.
Also, please comment as to the general press reports about how the banks need to return to lending. The banks previous lending policies added to the economic mess we are in today (note they did not create this - in my opinion).

As always,
Hail Freedonia !!
Rufus T. Firefly
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