Mark to market is beside the point

Marshall Auerback here.

Everyone is talking about marking to market as if its elimination is a silver bullet. So far as the economics goes, I am not sure that mark to market is such a big deal. The whole point of the banks is to make loans and hold them. Look at it this way- why should banks own anything that IS marked to market?

They should only own what they originate, and not buy any securities or other assets, apart from maybe their buildings. They have no reason to have access to any secondary markets. We then give them special protection so they effectively leverage government; they are intermediaries between government and the non-governmental sector. However, I think the objections raised are mostly political: how can the supervisors/regulators resist powerful private interest. And that is why banks must be kept small.

Furthermore, we had ‘mark to market’ when BofA bought Countrywide and Merrill. I don’t think the so-called “transparency” actually helped that much, did it? Banking isn’t a mark to market model, it’s a credit analysis model. You don’t want a banking system that makes a loan to a grocery store based on where it could sell it at 3am on a Tuesday.

The public purpose behind banking is government-insured funding and lending based on credit analysis- coverage ratios, sources of incomes, payment records, etc. etc.- all standards set by the government that does the funding. Banking is a big government loan program that uses private capital with profit incentives presumably to make sound choices to avoid losing their own capital.

When the regulators come into a bank the check all the credit aspects of our loans and if they fall short declare the loans impaired, write them down, etc. etc. If they are not doing that with the major banks that’s a failure of regulation and supervision.

If it turns out the FDIC has been negligent or acting fraudulently by knowingly funding what they have determined to be insolvent institutions as per regulation then they are guilty of what should be criminal activity and get 150 years in the electric chair!

This has nothing to do with gaming the accounting. For an extreme example, we have US Treasury securities that are trading at discount prices of Libor plus 70 basis points. Should banks who hold them take a loss that reflect the price of credit risk for the US government (not interest rate risk- that’s a different story and covered in gap regulation)???

Regulate them like utilities. It will never happen, but that’s the key.

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