A Few Sunday Thoughts: Common Sense, Disruption and Hope

Mark-to-Market Accounting Likely to Remain

Had the SEC repudiated mark-to-market accounting, it could have set the recovery of our financial sector back a generation. From today’s Wall Street Journal story:

Mark-to-market accounting requires companies to value financial assets at their fair value — the price they can fetch in the market. That has led companies to take big write-downs on thinly traded securities, even if the underlying assets aren’t severely troubled. The write-downs have put pressure on prices of financial firms’ stocks and forced many of them to sell assets or raise money to stay well above the capital requirements that have been set by regulators.

This “pro-cyclicality” effect has become a worry for financial regulators around the globe. In a speech last month, Treasury Secretary Henry Paulson said regulators must address pro-cyclical aspects of the financial system. “For example, mark-to-market accounting is clearly pro-cyclical. Yet I know of no better accounting method,” he said.

Why is mark-to-market a pro-cyclical concept? Perhaps because of the complexity and opaqueness of CDOs, CDO-squareds and their variants, the massive amounts of structured paper that have been distributed globally and the failure of the rating agencies to discharge their responsibilites in a professional and deliberate manner. And let’s not forget about the leverage embedded in many now-illiquid structures, rendering the mark-to-market changes that much more jarring in a downturn. With common stocks, exchange-traded options and liquid bonds, mark-to-market changes can be significant but generally don’t gap (large, discontinuous, short-term moves) nearly as much as structured mortgage paper and other less liquid instruments. As we’ve seen in the past year, entire markets can be closed literally overnight once panic sets in. And if you hold lots of securities dependent upon the smooth functioning of these markets – look out.

People need to understand that mark-to-market accounting isn’t bad. It’s just common sense. It’s objective. And it’s absolutely essential if the asset owner can’t finance its positions on a term basis, like most of the banks, investment banks and hedge funds that got caught napping while their seemingly liquid portfolios went to ice cubes in a nanosecond. Lobbyists, their banking industry employers and their cash have been at the center of trying to get mark-to-market accounting overturned. And it almost worked. This provides a strong argument for why lobbyists are destructive, self-interested guns for hire that serve narrow special interests and not the broader stakeholders. Like campaign finance reform, lobbying reform is another important issue that should be taken up by the incoming Administration.

Tribune Co. Taps Lazard, Weighs Filing for Chapter 11

The newspaper industry in its current incarnation is dead, and we didn’t need Tribune’s being on the brink to tell us this. It is hard to think of an industry that has been more disrupted by the Internet than print news media, whether due to its financial gutting by Craigslist, the time-sensitive reporting challenge posed by citizen bloggers or the editorial threats arising from smart, straight-talking writers who have moved their games online. The number of people I know who no longer read offline new media is staggering: they would rather create a roll-your-own style customized newspaper via Google Reader, iGoogle or any number of other applications for structuring and displaying online content. They augment this by following top thinkers on Twitter who frequently post links to relevant stories and provide a quick synposis. I see the newspapers’ plight as follows:

Blog Aggregators + Bespoke Blogs + Twitter vs. Newspapers

and alternative media is winning the war. If I can get it now, I can get it for free and I can get it without the restraints placed on members of the Fourth Estate, then why do newspapers matter? I think more and more people are asking this question every day.

Outside Pressure Grows for GM to Oust Wagoner

As Congress moves closer to approving a bridge financing deal for the auto industry, there is more discussion about accountability, standards, and oversight of the use of taxpayer funds.

The White House is proposing to create a “financial viability adviser” in the Department of Commerce, which would be empowered immediately to bring industry stakeholders together to begin negotiating plans to return each company to economic viability. The adviser would be authorized to approve short-term financing for the industry, according to a draft of the plan.

Top Democrats in Congress also want strong government oversight, but instead of a single person are pushing a seven-member board headed by a strong chairman who be given the task of helping the industry restructure. The board would include the secretaries of Treasury, Energy and Transportation. Late Sunday, Democrats proposed an alternative under which taxpayer dollars would flow by Dec. 15. Under the Democratic proposal, which is designed to preserve a role for Mr. Obama in the process, the board and its chairman would oversee the industry’s restructuring and would still have leverage to force concessions. But the pressure would come amid debates about the industry’s long-term financing needs, congressional aides said.

Now we’re getting somewhere. I’d like to see this oversight in the context of a bi-partisan, multi-member agency, with some non-Government officials also having a strong voice in the process. Perhaps a leading automotive economist. A retired industry staffer. Someone with experience in robotics and workflow optimization. An alternative energy guru. There need to be fresh voices with new perspectives working to restructure a badly broken industry, without regard to politics or personal interests, in essence, a SOC for the auto industry. I think this is an exciting possibility that is in its embroynic stages. I eagerly await the structure of this new oversight board with the hope that smart outsiders are invited to help. This has the potential to serve as a template for other industry initiatives. Let’s hope they do it right.

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