U.S. Central's $1.2 billion other than temporary impairment and the NCUA's resulting insurance levy on credit unions have spurred discussions regarding the now-controversial mark-to-mark accounting standards. Credit Union Times asked credit union financial managers their thoughts about the art of accounting and what they think should be done about mark-to-market accounting.
For approximately 70 years after FDR's decision to suspend mark-to-market accounting, banks and credit unions operated without M2M and the economy didn't have the threat of another depression. Maybe it's just coincidence, but immediately after M2M accounting was restored in 2007, the banking financial industry went into a tail spin.
I have read that of the $700 billion that financial institutions have written off, almost all of it has been M2M write-downs and not actual cash losses. Casualties of this failed practice are everywhere. But the biggest reason to eliminate M2M accounting is that it is blamed for killing banks (and maybe our corporates) and helping put the U.S. into a deep recession and possible depression.
Chuck Bruen
President/CEO
First Entertainment Credit Union
Hollywood, Calif.
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Accounting, as with all professions, is more art than science at the master level. Mark-to-market accounting is an example of an art form blundering from the sublime toward the absurd.
Traditional, historical accounting, even with its many limitations, remains the most appropriate method of business accounting. Reporting weaknesses in historical accounting are overcome within the statement footnotes in which estimates, valuations, potential impairments, etc. are disclosed. The risks are appropriately reported, the balance-sheet gyrations avoided.
Accounting theorists have succumbed to the same modeling opiate as economists, behavioral scientists and central bankers. They all start with the hallucinatory premise: "Let's begin by assuming a perfect world…" Public accounting should be more about integrity than valuation. With mark-to-market, we have neither.
Jim Blaine
President
State Employees' Credit Union
Raleigh, N.C.
The mark-to-market rules are in part causing the current financial crisis. For example, let's say you had the opportunity to make 100 prime mortgage loans for members at a 10% yield and those members placed 6% of the mortgage balance in share certificates, authorizing you to take losses first from their deposits. Would you make the loans? Absolutely.
But what if you were required to take 40% of the pool's value into a loan-loss account immediately upon issuance, depleting net income at a time when income is precious and the preservation of capital is imperative?
Investors cannot purchase high-quality securities because the accounting penalty is too high. It causes prices to plummet and write-downs to increase.
We believe in disclosure as a footnote or otherwise but not as a depletion of capital.
Emily Hollis
Partner
ALM First Financial Advisors
Dallas
Accounting is like football in many respects. Do you remember when the goal posts were on the goal line? Do you remember when they moved the goal posts back three yards from the goal line and somewhat right in the middle of the end zone? Do you remember when the goal posts were moved to the last line of the end zone?
All these changes have been made in the past 40 to 50 years in football, yet the playing field and end zone parameters have remained the same.
Accounting is very similar. The play field has remained the same: assets equals liabilities (deposits) plus capital. But the definitions of these have changed. Example: the allowance for loan losses has been moved from capital to the other side of the balance sheet and subtracted from loans.
How does a credit union mark its assets or securities and loans to market conditions, when there is no market for the assets? Should some loans or securities be marked to zero if there is not a market, even though this would cause some credit unions to have negative capital or reserve positions, thus potentially causing a panic? My answer would be to stick with the playing field we have, but lay these credit unions and banks who are busted (i.e., no capital left) down gently and work to reduce them in size by selling off and merging CUSOs and assets until the depository is at a size and capacity to operate again. Not an easy task to do, but it can and should be done, and as transparently as possible without causing a panic.
Mike Moebs
Principal
Moebs Services
Lake Bluff, Ill.
Mark-to-market is insane. Accounting is supposed to provide clarity, and mark-to-market doesn't do that. It literally distorts the market instead.
I heard last night that FASB suddenly saw the light after millions of people lost their wealth. That's terrible, that they're finally changing things they knew were distorted all along. All of a sudden we'll see an amazing recovery in the banking industry. These guys will still make a bundle of money sitting on the FASB board, even though they caused people to lose tremendous amounts of wealth, caused them real abuse because they allowed a distorted standard to continue. They should be in jail.
I honestly believe the NCUA did everything they could to avoid charging an insurance premium for the corporates; and yet, credit unions will still get this unbelievable charge for what is really a phantom expense. The NCUA knows it, but they have no choice. Talk about being stuck between the proverbial rock and hard place.
Bill Brooks, Owner
CU Prosper
Rehoboth Beach, Del.
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