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How to Fix the Financial Crisis: Suspend Mark-to-Market Accounting

Posted Feb 13, 2009 10:31am EST by Aaron Task
Related: ING, C, BAC, JPM, WFC, XLF, SKF
The economy sure isn't good, but the risk of a 1930's -style Depression are far lower vs. during the heart of the financial crisis in September-October, says, John Ryding, chief economist of RDQ Economist.

While far from perfect, various and sundry efforts by the Federal Reserve, Treasury and other global policymakers to inject capital into banks and guarantee deposits prevented the economy from falling off a Mt. Everest-sized cliff, Ryding says.

Still, there remains the prickly question of how to deal with banks' toxic assets, now euphemistically called "legacy" assets. Ryding, a former Bear Stearns chief economist, does believe there's a chance these assets really are just temporarily distressed. If true, that suggests many firms are suffering from a liquidity crisis, as policymakers and bank executives contend, vs. an insolvency issue, as many economists and market watchers fear.

One way to take the insolvency issue off the table is to suspend mark-to-market accounting, which compels banks to value assets on their balance sheet at the price they could fetch in the open market. Ryding says a big reason for the negative reaction to Treasury Secretary Geithner's plan on Tuesday was that he did not go this course, which would certainly be controversial but would give banks significant breathing room to deal with these legacy (nee toxic) assets.

Short of that, Ryding says it's critical for Geithner to properly structure his public-private investment fund proposal. Unlike other recent guests he generally agrees with the Secretary's decision to not let major institutions fail, citing the post-Lehman experience as a harbinger of future market chaos, and potential economic Armageddon.

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