Despite the market’s apparent aversion to mark to market accounting, Lloyd Blankfein, CEO of Goldman Sachs, this week spoke about the benefits of the rules, which he said could have provided an “early warning” of the financial crisis. Speaking at the annual International Organisation of Securities Commissions (IOSCO) conference in Tel Aviv, Blankfein said the practice of marking to market, or reporting assets at their current market value, meant that institutions were forced to face up to their losses.
“Had fair market been implemented more widely then people would have had an early warning and seen value erode,” he told delegates. “It’s painful to mark these things down, but it’s more painful to have to mark them down beyond the point where you can no longer afford the capital.”
Blankfein indicated that he is keen for more items to be included visibly on balance sheets to more accurately reflect the position of financial institutions and their assets. His comments were echoed by Mario Draghi, chairman of the Financial Stability Board (FSB), who contended that off balance sheet accounting rules were one of the main underlying causes of the financial crisis.
Draghi is critical of the “We don’t want to go back to what it was before,” he said. “There is a balance to be drawn as to how far regulation can go and how far we can trust the market.”
Blankfein’s comments are surprising given the market’s perceived stance on fair value accounting. The International Accounting Standards Board (IASB) and the US focused Financial Accounting Standards Board (FASB) have both recently been coerced by lobbyists to soften the mark to market rules to allow firms “significant judgement” in the valuation of their assets.
In April, the FASB was forced to revise its mark to market legislation following pressure from lobbying efforts by the US Chamber of Commerce, the American Bankers Association (ABA) and the country’s larger financial institutions. Moreover, on 12 March, the FASB was threatened with government action if it did not take action during a hearing of a House Financial Services subcommittee. Government officials told Robert Herz, chairman of the FASB, to get the rule changes implemented in a period of three weeks or face regulatory intervention.
In May, the IASB faced similar pressure when European Union finance ministers kicked up a fuss about the disparity between accounting standards in the region and the now more relaxed rules in the US. As a result, it was forced to expedite its decision making process on the subject in order to appease political lobbyists. The IASB had originally planned a revision of IAS39 to be published in October, but was forced to promise a draft of the revisions for July.