Friday, February 17, 2012

A Step Backwards on MTM Accounting

The WSJ reported that Goldman Sachs and Morgan Stanley will switch from marking-to-market to historical-cost accounting of their $100 billion corporate loan portfolios. This is allowed since both are bank holding companies. The move is motivated by lower capital requirements and less earnings volatility. Great! So we are going to pretend that $100 bn defaultable loans which may be worth $80 bn are worth $100 bn so that we don't have to hold capital against them. We are also going to manipulate earnings writing the loans up against losses and down against gains. But wait! All commercial banks already do this kind of manipulation, so GS and MS are simply joining the crowd. No wonder hundreds of thousands of homes sit empty with banks unwilling to sell them at a loss to avoid marking to market. The insanity of government regulation is infinite.

1 comment:

  1. Preach brother! Amen, its the truth!! Finance is such a beautiful invention, why does accounting have to always come in and mess it all up!

    ReplyDelete