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The talk about the FASB decision to relax mark-to-market accounting rules is seriously overblown.  I do not think that this was a particularly good decision, but the idea that this will horribly spook investors, or that the FASB has given the banks permission to lie to us, is extravagently unlikely.

First of all, the banks have to disclose in the notes to their financial statements the size of the boost their balance sheet gets from the change in accounting rules.  That will give investors a good guide to backing out that change--which is probably why Bloomberg reported this morning that Citibank isn't even bothering to make it.


If you can't or won't read the notes to a 10-K or 10-Q, you should not be investing in bank stocks.  Let me put that another way.  IF YOU CAN'T OR WON'T READ THE NOTES TO FINANCIAL STATEMENTS, YOU SHOULD NOT BE INVESTING DIRECTLY IN STOCKS.  I really have no sympathy for anyone who decides to gamble on a bank stock right now without even basic financial literacy.  They can hardly say they weren't warned that this is mighty dangerous behavior.

Second of all, the mark-to-market price is not the "true" price; it's a price in an extremely illiquid, and therefore fairly inefficient, market.  The value the banks put on it isn't any more likely to be accurate, of course.  But we're talking about swapping an optimistically biased inaccurate price for a pessimistically biased one, not The End of Accounting As We Know It.

But we are not doing this to fool investors; we're doing it because of regulatory capital requirements.  The problem with things like reserve ratios is that while in theory they should be countercyclical, in practice they aren't.  A nice fat stack of reserves should enable you to better weather downturns.  But of course, as long as they're required reserves, you can't actually touch them.  If the government required you to carry $300 in your wallet at all times, you wouldn't have plenty of spending money; you'd have no spending money, unless you carried a lot more than $300.

A perfect regulator in an ideal market would relax capital requirements in bad times, and raise them in good times.  The actual regulators we have, however, are terrified of spooking the markets if they do so--and more importantly, terrified of the all-out political war that would follow.  So we lower capital requirements in good times, when all that capital seems like an untouched gold mine, and leave them stat, or raise them, when everything's going to hell.  FASB, which is pretty insulated from political pressure, is doing what it can to correct that problem.  Unfortunately, what it can do is undermine a rule that is, all things considered, a better idea than the alternatives.

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Megan McArdle is a columnist at Bloomberg View and a former senior editor at The Atlantic. Her new book is The Up Side of Down.

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