Tags: forbes | market

Forbes: Mark-to-Market Led to Crash

Monday, 12 Oct 2009 11:21 AM

By Gene J. Koprowski

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Mark-to-market accounting rules, imposed by the government in 2007, compelled major banks and life insurance companies to write down the value of their capital as if it were part of “a day-trading account,” and that ludicrous regulatory shift helped foster the stock market crash last year, says Steve Forbes.

Writing in Forbes magazine, the pundit, publisher, and one-time candidate for president said that before 2007, capital was assessed at book value for regulatory purposes, or at the price for which the institution paid for it.

“Thus, most of the hundreds of billions of dollars of losses these financial institutions reported were not actual cash losses but artificial book losses,” writes Forbes.

“It's no coincidence that when mark-to-market accounting was modified this spring, the equity markets, led by financial companies, took off like rockets from their lows.”

Thus, what began in August 2007 and culminated in the fall of 2008 was not the failure of free markets, “but the result of bad government actions,” writes Forbes.

Regulations that are now being proposed for the nation’s 5,000 banks, including salary caps, are a repeat of the same kind of arrogant mistakes by the mandarins in Washington D.C. who think they can control all economic risk, Forbes adds.

“Experience shows that in managing or overseeing most things, government is suffocatingly incompetent,” Forbes writes.

Others concur that the mark-to-market shift, not some inherent failings of capitalism, was a behind-the-scenes catalyst for the debacle on Wall Street.

Citigroup chief executive Vikram Pandit recently told analysts that Citi experienced an outsized share of industry mark-to-market losses.

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