Hard to pick up a financial paper today without seeing some criticism of mark to market. Writing in the FT, Christopher Whalen observes that “A large portion of the crisis of confidence now affecting global markets comes from non-cash losses reported as a result of the adoption of “fair value” accounting rules in the US. Fair value accounting was adopted in the US after years of debate and, in theory, provides more transparency than measurements based on historical cost.”

Whalen, co-founder of Institutional Risk Analytics, quotes a finance prof on the dangers of academics who think all markets are deeply liquid and cites another academic on the issue:

 Sylvain Raines, a lecturer at Baruch College in New York, told a meeting of the Professional Risk Managers International Association last September: “The Chicago School of Economics has been telling us for a century that price and value are identical, i.e. that they are the same number . . . If we do not recognise the fundamental difference that exists between price and value, then we are doomed.”

 Holman W. Jenkins, Jr. , a WSJ columnist, made similar points, blaming SEC Chief Richard Breeden in the early ‘90 s and noting that others warned of the danger, among them Fed Chairman Alan Greenspan and Bank of America’s Richard M. Rosenberg. “Particularly notable were their warnings that the new rule, when combined with risk-based capital standards, might lead banks to hold fewer loans on their own books, packaging more of them as complex securities for sale to investors.”

 And, he says, the regulators and academics overlooked another danger — that speculators would go on strike and pull the liqudity the market relies on.  Reuters, in its Open Model Strategy for Valuation Risk Management, announced last week, seeks to address some of these issues.

Filed under: risk