Valuations

When we consider the state of the economy and more specifically the debacle in the banking system, we must understand a couple of recent legislative changes in the accounting regulations that has greatly contributed to this problem.

They are the repeal of the Glass-Stegall Act in the late 90's and the Sarbanes-Oxley Bill introduced in the aftermath of the Enron disaster.

These two acts by congress have gone a long way to exacerbate the failure in our banking system and economy. Once again this demonstrates the ineptness by and large of elected officials whose primary motives to pass legislation are driven more by pandering to their constituents, than acting as true statesman to represent what's in the best interests for the nation as a whole.

The Glass-Stegall Act was passed in the early 30's in response to commercial banks in essence investing in the stock market and the tremendous exposure that practice had on the solvency in the banking industry. This legislation was passed to protect not only the solvency of the commercial banks and protection for it's customer's deposits but also to draw a definitive line between the commercial and investment banks and how they conduct business.

Much of the disaster that has happened in today's banking industry has been a direct result of the repeal of the Glass-Stegall Act. It's repeal has once again allowed commercial banks to become involved in investment activity that the Glass-Stegall Act specifically forbid.

To compound this ill advised repeal, our elected officials had another knee-jerk reaction to the scandal and implosion of Enron. The Sarbanes-Oxley bill instituted another albatross of accounting mumbo-jumbo that made the formation of public companies almost non-existent in our country while at the same time placing a tremendous cost on existing businesses on adhering to an ever more complex and costly set of accounting standards.

One of the most reprehensible tenants of the Sarbanes-Oxley legislation was the accounting method for business to evaluate existing inventories on the balance sheets through an accounting practice called Mark to Market. This strict accounting principle forces a business to value their inventory based on what the market will fetch on the open market as of today only.

This method of evaluating inventories and assets in this way only goes to over-inflate their value in a strong market and over-devalue them in a weak market. The repeal of Mark to Market, or at least a revision that could possibly use a 3 year rolling average of inventories and assets, would portray a more stable valuation for said inventories and help business and the government maintain a more accurate picture of the companies true worth.

For example, under the present accounting rules put forth by Mark to Market, assets on bank balance sheets that comprise questionably secure mortgages are valued at zero. These assets that are valued in this way create severe liquidity problems for banks that are actually in a better cash position today than they were a year ago. This accounting procedure forces banks to show book losses that portray their balance sheets in a shambles when in fact that is not the case.

If in fact these questionable loans were in fact worth zero, I'd take as many of these mortgages as possible for that price and so would you. First of all, every one of these mortgages represents land the home is built on which most certainly is not worth zero, as well as having a structure on it that is comprised of bricks and mortar, that again is certainly worth more than zero.

The repeal of Mark to Market would instantly improve the book valuations on bank balance sheets and jump start the banks ability to making credit available to creditworthy individuals and businesses.