Holman Jenkins of the Journal quotes Warren Buffett on the destructiveness of mark to market accounting for regulatory purposes and goes on to explain:

“Banks can be forced to raise capital when capital is unavailable or unduly expensive; regulators can be forced to treat banks as insolvent though their assets continue to perform.
What happens next is exactly what we’ve seen: Their share prices collapse; government feels obliged to inject taxpayer capital into banks simply to achieve an accounting effect, so banks can meet capital adequacy rules set by, um, government.”

But that doesn’t mean they shouldn’t report on a mark to market basis to investors. It’s just that when the market has disappeared is the worst time to force banks to write down performing investments to zero or thereabouts.

Hm, don’t regulators criticize such practices as pro cyclical?

Filed under: Technology