As the afterglow of the G20 love-in fades there was something else worth considering this week: the Financial Accounting Standards Board (FASB) decided yesterday to relax its mark-to-market rules.
Nearly from the beginning many financial companies have opposed mark-to-market on the grounds that investors "wouldn't understand" the pricing mechanisms of thin and volatile markets. What was the point, many argued, in adopting a system that simply highlighted pointless earnings volatility quarter after quarter?
Interestingly, these arguments lost some passion once the same financials heard the kerching! of the Easy Al economy ringing in recognition of their unrealised asset gains. It was all one way, it seemed. Only it wasn't. And now - of course - everyone claims to be holding to maturity or that the market for their asset is temporarily "not active".
FASB has taken these issues on board and with its proposed FSB 157 will be asking firms to make what are, essentially, economic judgements. Very reasonable. But those judgements are also an increase in wiggle room in the remuneration game. Without inputting the slightest ignoble motive to the FASB proposal it is simply hope against experience to give an inch and not expect to lose a yard in this particular principal-agent problem.
It seems a long time ago that Ken Lay and Jeff Skilling hid losses of over $1 billion off the balance sheet. The fair value accounting principals were part of the response to that fraud. Those who claim mark-to-market is the problem and markets have badly over reacted because of it ought to put their money where their mouths are and buy up what is so cheap.
History, though, consistently shows that over reactions are a function of psychology combing with reality, not accounting rules. Banks, it seems, now find reality to be materially overrated.
The bottom line is that, whilst imperfect, fair value accounting has improved disclosure, highlighted issues and thus kept the market more honest than it otherwise would have been. That is why is ought to remain in place, undiluted.
Unfortunately, the keys may just have been given to the inmates.