My title is taken from the following quote from Monday’s (10-12-09) Dallas Morning News:

“The financial services sector has enjoyed a fine summer rally, but I just can’t get too excited about a bunch of financial stocks leading the market higher.

I mean, we are talking about banks, for heaven’s sake. These are the same charlatans and ne’er-do-wells who got us into this mess in the first place.” (Emphasis added)

Where to start?

First, let me simply say that, in my 36-year career with the Fed, I met many, many bankers. I don’t recall any that would fall into the category of charlatans and ne’er-do-wells. Not any.

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"Accounting Arcana"

 "It's fascinating that the not-so-tiny matter of a
$30 billion loss comes down to accounting arcana,
but it does."

I copied that quote down last night when half asleep and this morning I can't recall where I got it. Now I can't find it. My best guess is the WSJ.com. My apologies to the author.

The article was about the unfortunate suicide of a Freddie Mac official, despite the fact that he had recently won a ruling from the SEC worth $30 billion. In my previous post, "Stressing Over Bank Stress Tests," I had tried to make a similar point: How accounting rules, which often seem arbitrary and not well suited to the situation at hand can make a huge difference and how bankers' challenging the results of the recent stress tests have about as good a chance of being "correct" as do the bank supervisors. I didn't feel like I had made my argument clear enough; so, last night I realized that what was missing was the term "accounting arcana."

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Yesterday I did an interview on the Jim Blasingame show called Which Direction is the Economy Moving? We spent a significant amount of time discussing Mark to Market and the banking crisis.

Former FDIC Chairman, William Isaac, gave me permission to post his letter to the House Financial Services Committee on the FASB proposals. 
Click here: [Isaac on FASB Mark to Market]

(Running Out the Clock)

When a subcommittee of the House Banking Committee held hearings on mark to mark accounting, Congressional intent was very clear.

Either the Financial Accounting Standards Board (FASB) make some common- sense changes or Congress would do it through legislation.

Those hearings were held on Thursday, March, 12.  FASB met the following Monday and proposed a couple of reasonable-sounding modifications and a reasonably- short comment period. Their modifications were inadequate, but they would have been modestly helpful had they not applied only to the future.

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Here's an interview I did with Vinny Catalano (President and Global Investment Strategist with Blue Marble Research) on mark to market, the Geithner plan, Keynes' paradox of thrift and the Fed's balance sheet.
[Bob McTeer Financial Crisis Interview]

Yesterday I was on CNBC's Closing Bell with Brian Wesbury to discuss the Treasury's new plan to form public-private partnerships to buy toxic assets from financial institutions. We agreed that reforming mark to market would be just as effective.  See the video clip here: [Bob Mcteer on Mark to Market]

Here is the text of a speech I gave recently to a group of investors in Hong Kong…

It's good to be back in Hong Kong, the poster child for free enterprise and a stable currency. My first visit was to speak at a conference on currency boards, at the Hong Kong Baptist University.

How many Baptists do we have in the audience?

Me neither.

I was raised as a Baptist but I soon learned that being Baptist doesn't keep you from sinning; it just keeps you from enjoying it.

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During last Thursday's hearings by the Subcommittee on Capital Markets, Insurance, and Government Sponsored Enterprises on market to market accounting, the most impressive verbal and written testimony for my money was William Isaac's. Bill gave me permission to share his testimony with you here.

Yesterday (Thursday, March 11) I testified on mark to market accounting before the House Subcommittee on Capital Markets, Insurance, and Government Sponsored Enterprises, a Subcommittee of the Committee on Financial Services.

Here is a copy of my testimony.

During the hearing, Representative Spencer Bachus, Ranking Member of the parent Committee recommended my blog post, "My Mark-to-Market Nightmare," to the other subcommittee members and later asked that it be entered into the record. Here is a link to "My Nightmare."

My post last Wednesday announced I would be a guest host on CNBC's Squawk Box. For those who missed it, the CNBC video clip can be found here. The full video (excluding commercials) has been uploaded to the NCPA website and can be accessed here.

On January 22, 2009 I posted a letter from Alan Greenspan on the inappropriateness of mark to market accounting for the commercial bank business model [click here]. I also quoted from a recent report issued by Paul Volcker on the same subject.

For your convenience I'm posting two other pertinent letters on the subject: One by Treasury Secretary Brady, dated March 24, 1992 [here]; and one by William Taylor, head of the Federal Deposit Insurance Corporation, dated March 2, 1992 [here].

I'm scheduled to be on CNBC's Kudlow Report tonight around 7:20 Eastern; 6:20 Central. We will be discussing Mark to Market. For general information about The Kudlow Report go here.

[In case you missed it, here's the video footage. Click here.]

Here are three interviews I did March 9, 2009 at the World Money Show Orlando. Click on the links to view the clips:

Extreme Measures Are Needed

Evils of Mark to Market

Stimulus Efforts Need Focus

Paul Volcker on Mark to Market Accounting 

Former Fed Chairman, Paul Volcker, Chairman of the Group of Thirty, Consultative Group on International Economic and Monetary Affairs, Inc., just released a study with recommendations on financial reform.

Recommendation #12 on Fair Value Accounting reads as follows:

"a. Fair value accounting principles and standards should be reevaluated with a view to developing more realistic guidelines for dealing with less liquid instruments and distressed markets.

b. The tension between the business purpose served by regulated financial institutions that intermediate credit and liquidity risk and the interests of investors and creditors should be resolved by development of principles-based standards that better reflect the business models of these institutions . . . ."  

Alan Greenspan on Mark to Market Accounting

On November 1, 1990, Federal Reserve Chairman, Alan Greenspan, in a 4-page letter to Richard Breeden, Chairman of the Securities and Exchange Commission, said, in part:

"The Board believes that market value accounting raises a substantial number of significant issues that need to be resolved before considering the implementation of such an approach in whole or in part for banking organizations.

Accounting methodology should be developed to measure the results of a particular business purpose or strategy; it is not an end in itself. For an institution whose business purpose is to trade marketable financial assets on an intra-day basis, for example, closing daily market values would measure the success or failure of that particular business purpose. An end of the day balance sheet, marked to market, is clearly the appropriate accounting procedure in the example.

Generally, the business strategy of commercial banks, on the other hand, is to employ their credit insights on specific borrowers to acquire a diversified portfolio of essentially illiquid assets held to term. The success or failure of such a strategy is not measured by evaluation such loans on the basis of a price that indicates value in the context of immediate delivery. Clearly, one aspect of value in an exchange is the period of delivery.  But the appropriate price for most bank loans and off-balance sheet commitments-is the original acquisition price adjusted for the expectation of performance at maturity. It is only when that price differs from the book value of the asset that an adjustment is appropriate.

A reserve for loan losses is such an adjustment. To mark such an asset to a market price intended to reflect the value of a loan were it liquidated immediately is interesting, but not a relevant measure of the success of commercial banking."

A blurry copy of Chairman Greenspan's letter is provided here.

I couldn't sleep at all last night. It started with a dream-nay, a nightmare-that I had taken a three-week vacation in a remote part of the world where cell phone reception was happily non existent. There were zero bars.

It was a good vacation. I came home refreshed, full of vim and vigor, and ready to re-join the rat race. All that changed when my accountant called with bad news. He said I was broke-flat broke. I thought he was kidding.

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"There ain't no money in poetry.  That's what sets the poet free.
I've had all the freedom I can stand."
Guy Clark, Cold Dog Soup

In the beginning, there was the stretch for yield that led to subprime, best described in a Japanese Haiku:

If regular loans
Don't earn enough to suit us
Maybe bad loans will.

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The American Spectator (online) has been running an excellent series of articles on the damage mark-to-market accounting has been doing to our financial system. They have some real heavyweight authors, plus myself. I'm a heavyweight in a different sense.

The series is introduced by Editor-in-Chief, R. Emmitt Tyrrell, Jr. accessible from my article. Once there, you can follow the trail to the following:

Newt Gingrich,

Brian Westbury, FT Advisors

Edward Yingling, President of the American Bankers Association,

William Isaac, former director of the FDIC

Gary Wolfram, Professor of Economics, Hillsdale College

While I'm trying to think of something to say, let me just say some things I've been thinking.

Best Investment Advice 

The best investment advice I've heard is from Will Rogers, who advised:         

"You buy your stock, and, when it goes up, sell it.  If it don't go up, don't buy it."

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While spending and investing billions of dollars-or is it trillions?-trying to heal the sick credit markets, the government continues, inexplicably, to ignore the low-hanging free fruit of suspending or modifying mark to market accounting. We are hoisting ourselves on our own petard by adhering strictly to accounting rules that unnecessarily threaten to put thousands of viable financial institutions out of business.

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