Saturday, April 30, 2005

Mark to market

In 1997 the SEC changed the accounting rules, allowing publicly held companies to chose a mark to market valuation system, where an asset could be valued on its market value. This change in accounting rules made the Enron debacle possible. My hearty congratulations to those in the SEC who made the ruling for remaining anonymous. Excellent bullet dodging and buck passing, even on Washington standards.

I learned about this watching Enron, the smartest guys in the room. It is a very revealing film and I recommend it. One of the things the movie makes very clear is that this was not just a question of a few bad guys at the top of Enron. This scandal was only possible because all those who could have stopped it, the accountants, financial analysts, the financial press, FERC, all eagerly cheered it on. Enron represented a perversion of our economic system, whose lessons have still not been learned in my judgment.

1 comment:

Nikhil Raheja said...

Both the bankruptcies, Enron and Bear Stearns have their roots in the Mark to market accounting method. While it helped Enron, since valuing the asset is the accountant`s responsibility, they could value their holdings as high as they wished to, it has hurt Bear Stearns since it undervalued its assets and lost all liquidity.
Ben Bernanke has raised both hands in submission, saying "I don’t know how to fix it. I don’t know what to do about it." the economy has serious trouble.