On Sunday, the Financial Times ran an article about mark-to-market accounting. Specifically, reporting on a survey conducted by PricewaterhouseCoopers. The accounting firm interviewed 60 leading US and international investors about a variety of topics, and specifically asked them if they thought financial assets and derivatives should be valued on a mark-to-market basis. Here's what they found:
"The FASB has defended its proposals, which have been criticised because they would increase balance sheet volatility, saying that US investors are in favour of greater use of fair value because it provides more transparency over a bank's financial health.
However, the PwC findings, the result of more than 60 hour-long interviews with leading US and international investors, present a different view. They indicate that those surveyed are more in favour of proposals from the FASB's counterpart, the International Accounting Standards Board, which is moving in the opposite direction by putting greater emphasis on traditional cost measures to value loans.
The PwC survey found most investors preferred to measure short-term instruments, such as derivatives, at fair value but to use amortised cost accounting for loans and deposits because the information "better reflects an entity's underlying business and economic reasons for holding an instrument".
The key point here is that FASB has always argued that investors "want" mark-to-market accounting. We have argued that this may be true of short-sellers, but it is not true of other investors. This survey suggests that our view has been correct and investors understand the devastating, pro-cyclical impact of mark-to-market accounting.
This "talk" goes along with investors "walk." As the chart above shows, the stock market in 2008 and 2009 rallied every time investors thought there might be changes to mark-to-market accounting rules, and fell every time they were disappointed. But that the Panic of 2008 ended once the rules were changed to allow cash flow to be used to value assets. The stock market bottomed the very day it became clear Congress would force changes in the rule. The PricewaterhouseCoopers survey reflects what the markets had already told us.
If the FASB gets its way and fair value accounting is expanded, the banking system will again be unstable and the probability of another financial panic one day will be much higher. Investors and the International Accounting Standards Board understand this. FASB does not.
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Posted on Tuesday, June 15, 2010 @ 12:43 PM
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