At this point the Financial Accounting Standards Board is probably experiencing what I’d call the Bristol Palin effect. That’s to say that once you’ve been shown to lose your virginity in a very public way, you can talk all you want about the virtue of abstinence but no one’s going to put much credence in what you have to say.
FASB, the outfit that sets financial and accounting rules for companies, including insurers, has always had a reputation for chastity when it came to rule-making. We don’t care how strong the hormonal pressure coming from outside is, FASB seemed to say, we’re not going to even give the appearance of looking like we gave in. We have a reputation to uphold.
That was then.
Now, FASB has to come to terms with the irrefutable fact that you only lose your virginity once.
Years back, FASB approved, after a seemingly endlessperiod of deliberation, the mark-to-market rule that is causing such havoc in the financial markets now, especially in the banking sector, when the value of assets is tanking all over the place.
Mark-to-market means banks and others have to value the assets on their books for what they’re worth now. It’ll come as no surprise to you that these assets-mortgages, mortgage-backed securities and their ilk-have seen their value drop precipitously. Thus, the tremendous hits that financial institutions have had to take on their balance sheets and the spreading, deepening pain as the recession marches on.
Needless to say, when assets seem to see their value growing daily, as they did just a few years ago, mark-to-market is oh so satisfying. Especially if you’re an executive whose bonus is tied to the growing value of those assets and the revenue they produce in spinoffs of one kind or another. It’s just human nature.
But now that the value of assets on banks’ and insurers’ books is plummeting, the mirror image of the formerly positive side of human nature kicks in. Banks don’t like mark-to-market now. And banks have powerful friends in Congress and government.