Daily Flog: Collateralized damage, weapons of monetary destruction, albinos flee Burundi


Hit the books before the bookkeepers hit you.

Like it or not, the issue of “mark-to-market” accounting rules, which I tried to delve into yesterday, is something to keep an eye on.

And it’s a good issue on which to gauge the presidential candidates. John McCain, for instance, would be happy as hell if the SEC abolished the mark-to-market rules for how corporations value their assets.

That puts him squarely against a vast array of consumer groups, big-time investors, and accountants who say that abolishing mark-to-market accounting is idiotic and would set up the economy for an even bigger fall.

I detailed some of that yesterday, but see the Center for Public Integrity’s Paper Trail blog. In “Counting on a New Accounting,” Marianne Lavelle gives some good background on the issue.

More below on the specifics of Lavelle’s piece — and a reminder of one of the best pieces of investigative journalism on corporate kleptocracy not to appear in a newspaper or magazine but in an SEC document — but first . . .


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N.Y. Daily News: ‘Taser cop suicide note: It’s my fault’

Election Law Blog: ‘Homer Simpson Tries to Vote for Obama But is Thwarted by Electronic Voting Machine’

Freedom to Tinker: ‘Judge Suppresses Report on Voting Machine Security’

McClatchy: ‘Government by Goldman Sachs comes to end’

The Register (U.K.): ‘California outlaws RFID tag skimming’

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N.Y. Daily News: ‘Chopped her up, buried her in cement “for love” ‘

The Register (U.K.): ‘Nokia chief: Mobile superiority coming to America’

Jewish Daily Forward: ‘Haredim Begin Confronting Pedophilia’

L.A. Times: ‘Lobbying blitz ushers bailout bill back to House’

McClatchy: ‘Saving Wall Street: Bailout bill gives tax break to NASCAR’

The Register (U.K.): ‘Catholic priests cane YouTube over blasphemous vids’

Jurist: ‘US soldier pleads guilty to accessory to murder in Iraqi detainee deaths’

BBC: ‘Albinos in Burundi flee killings’

Jewish Daily Forward: ‘The Ibos of Nigeria: Members of the Tribe?’

N.Y. Times: ‘Agency’s ’04 Rule Let Banks Pile Up New Debt, and Risk’

Washington Post: ‘On the Sunny Beaches of Brazil, A Perplexing Inrush of Penguins’

McClatchy: Wachovia dumps Citigroup, agrees to merge with Wells Fargo’

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N.Y. Times: ‘Falling Oil Price Is a Positive Note Amid Turmoil’

Washington Post: ‘Activists Angered By Blame For Crisis’

China Digital Times: ‘China tangled up in red, white and blue’

BBC: ‘Congo rebel “to expand rebellion” ‘

Getting beyond the yipping and yapping of pseudo-news like the TV debates to ferret out something that actually matters more than a reality show: The Center for Public Integrity’s Marianne Lavelle tackles the topic of mark-to-market accounting (one of the keys to the current financial crisis) and notes:

It has to be one of the more obscure subjects ever addressed in a news release from a major presidential campaign. John McCain — who two weeks ago called for the ouster of Securities and Exchange Commission Chairman Christopher Cox — now is praising the agency. Why? Its decision on Tuesday “to relax mark-to-market accounting requirements.”

“John McCain is pleased to see that the SEC has finally decided to permit alternative accounting methods to mark-to-market accounting for securities where no active market exists,” said McCain’s chief economic adviser, Doug Holtz-Eakin.

And here’s much of the rest of her item — I’m quoting it at length because the topic may seem too arcane for you to click on:

While the administration and Congress grapple with how to address that “toxic waste” on the books of financial institutions, there’s a growing drumbeat in favor of just allowing the banks to account for the unwanted securities as more valuable than they now seem to be. And that drumbeat is led by the commercial banking industry, an ever-potent force on Capitol Hill, having given $13 million in campaign contributions to Democrats and $15 million to Republicans in this election cycle, according to the Center for Responsive Politics.

Walter P. Schuetze, chief accountant of the SEC in the 1990s, who is now retired, remembers the banking industry’s long-standing opposition to mark-to-market. Schuetze, following the lead of then-SEC Chairman Richard Breeden, promoted mark-to-market to remedy the abuses seen during the savings and loan crisis of the late 1980s. Back then, part of the problem was that “savings and loans and commercial banks were able to use historical cost accounting to make up their income as they went along,” Schuetze says.

Over the next 15 years, the regulators embraced mark-to-market as the method that would best show investors the fair value of an institution’s assets.

“The band began playing mark-to-market, but the banking industry seemed to have two left feet,” says Schuetze. “They didn’t want to dance to mark-to-market — they didn’t like that tune at all because it took away all of their flexibility.”

Although the McCain press release praises the SEC for a move to “relax” the mark-to-market rule, the regulators said it was a “clarification,” spelling out how management can address the value of assets in a market that is not functioning, like the market in the subprime mortgage securities. The SEC, joined by the Financial Accounting Standards Board in the statement, reaffirmed its belief in the market price, but said, “The determination of fair value often requires significant judgment” — perhaps giving the banking industry some of the flexibility it seeks.

But the issue is far from resolved. The Senate bailout bill orders the SEC to conduct a study on the impact of mark-to-market accounting, and spells out that the agency has authority to suspend the accounting rule entirely.

Schuetze himself wrote a note to SEC Chairman Christopher Cox last month, warning that such a move would be “disastrous” because it would hide from investors the information they need about the true financial state of institutions. “The fair values at times of stress are just as important as at times of calm,” he wrote.

Did you notice the mention of former SEC Chairman Richard Breeden? He was the author of one of the all-time great expositions on corporate hubris and corruption: the August 30, 2004, report he prepared for the board of the odious legend-in-his-own-mind Conrad Black‘s former company, Hollinger International. (See the report for free on the SEC’s own site; see my 2007 items here and here.)

In the report, the former SEC chair actually titled one of his topics “CORPORATE KLEPTOCRACY” — to refresh your memory, he was talking about the actions of a corporate boardroom that included Henry Kissinger and Richard Perle. (The report gives Kissinger a pass but roasts Perle.)

The massive report, beautifully and clearly written, is just about as fine a piece of investigative journalism as has ever been done about the workings of corporate America. And it was written from the inside, on the inside — not for a newspaper or magazine. Check it out before the bank repossesses your house and computer.