Mark To Market Overdriving

Now comes Warren Buffett, a big investor in Wells Fargo, M&T Bank and several other banks, who, during his marathon appearance on CNBC Monday, clearly called for suspension of mark-to-market accounting for regulatory capital purposes.

We add the italics for the benefit of a House hearing tomorrow on this very issue. Mark-to-market accounting is fine for disclosure purposes, because investors are not required to take actions based on it. It’s not so fine for regulatory purposes. It doesn’t just inform but can dictate actions that make no sense in the circumstances. Banks can be forced to raise capital when capital is unavailable or unduly expensive; regulators can be forced to treat banks as insolvent though their assets continue to perform.

via Holman Jenkins Says Warren Buffett’s Call to Suspend Mark-to-Market Accounting Could Relieve Undue Pressure on Banks – WSJ.com.

Warren Buffet knows a thing or two about banking and finance. The act of using one variable for too many purposes is called overdriving, and it almost always leads to trouble. I hope people give Buffet’s idea a fair hearing.

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