Buffett on Mark to Market
By David Henderson
My favorite Wall Street Journal writer, Holman W. Jenkins, Jr., has an excellent piece today on Buffett’s views of Mark-to-Market. It seconds what I quoted Less Antman saying last week and what commenter Patrick Sullivan pointed out. Sullivan linked to a debate on The Jim Lehrer Newshour between former FDIC chief William Isaac and Paul Krugman. Isaac had said:
I think those banks today are in better shape than the banks that we dealt with in the 1980s. We had 3,000 banks fail in the 1980s. And if we had — if we had had mark-to-market accounting — and that’s where the SEC requires these banks to mark down marketable assets to whatever the current market price is — if we had had that in the 1980s, every one of the major banks would have failed, absolutely.
Here’s the key passage from Jenkins:
Now comes Warren Buffett, a big investor in Wells Fargo, M&T Bank and several other banks, who, during his marathon appearance on CNBC Monday, clearly called for suspension of mark-to-market accounting for regulatory capital purposes.
We add the italics for the benefit of a House hearing tomorrow on this very issue. Mark-to-market accounting is fine for disclosure purposes, because investors are not required to take actions based on it. It’s not so fine for regulatory purposes. It doesn’t just inform but can dictate actions that make no sense in the circumstances. 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.
Interestingly, according to Jenkins, CNBC left out the key part of Buffett’s statement. Jenkins writes:
CNBC, sadly, has been playing a loop of Mr. Buffett’s remarks that does a consummate job of leaving out his most important point. Nobody cares about the merits of mark-to-market in the abstract, but how it impacts our current banking crisis. And his exact words were that it is “gasoline on the fire in terms of financial institutions.”
Depressing bank stocks today, he said, is precisely the question of whether banks will be “forced to sell stock at ridiculously low prices” to meet the capital adequacy rules.
“If they don’t have to sell stock at distressed prices, I think a number of them will do very, very well.”
He also proposed a fix, which CNBC duly omitted from its loop, namely to “not have the regulators say, ‘We’re going to force you to put a lot more capital in based on these mark-to-market figures.'”