The Corner

Bloomberg Off the Mark

According to David Reilly in a recent Bloomberg column, the numbers prove that mark-to-market isn’t having the perverse pro-cyclical effects many commentators have claimed they do.

He writes, “Of the $8.46 trillion in assets held by the 12 largest banks in the KBW Bank Index, only 29 percent is marked to market prices, according to my analysis of company data.” Ok: But 29 percent is far from a trivial percentage, especially of such a large number; and the measure may be less important than the percentage these assets make of net assets (a percentage which would of course be higher).

Reilly worries that investors need more, not less, mark-to-market accounting in order to have confidence in companies–a fear that ignores the distinction between adjusting the rules for regulatory-capital purposes (which is what most reformers want) and adjusting it for disclosure purposes. Only by ignoring that distinction can Reilly claim Fed chairman Ben Bernanke for his side of the argument. Bernanke “reiterated his support for the principle of marking to market,” as Reilly puts it, but also supported taking a look at its impact on regulatory capital.

This passage also strikes me as undermining rather than strengthening Reilly’s case.

Consider the refrain that banks can’t mark assets to market prices because markets are frozen. Of the 12 banks in the KBW that I reviewed, only 5 percent of total assets on average were designated as being hard to value because market-based prices weren’t available.

These so-called mark-to-myth assets represented 58 percent on average of total shareholders’ equity among the banks. They fall, though, to just 16 percent of equity if the Big Four banks — Bank of America Corp., Citigroup Inc., JPMorgan Chase & Co. and Wells Fargo & Co. — are excluded.

First, again, it seems as though the 58 percent figure is more relevant than the 5 percent one. Second, I don’t know why you would exclude those companies. Third, for them, the “mark-to-myth” assets must be higher than 58 percent–possibly much higher. And fourth, isn’t there a counterparty risk problem that Reilly isn’t looking at? A lot of companies deal with the Big Four or deal with companies who do.

Ramesh Ponnuru is a senior editor for National Review, a columnist for Bloomberg Opinion, a visiting fellow at the American Enterprise Institute, and a senior fellow at the National Review Institute.


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