Why Newt Gingrich Is Wrong About Mark-To-Market Accounting

Calling the Bush-Paulson bailout proposal a “dead loser” and a “very, very bad idea,” Newt Gingrich is offering his own plan: eliminate the capital gains tax, suspend mark-to-market accounting, repeal Sarbanes-Oxley, and pass an “all-of-the-above” energy bill. The Wonk Room has discussed in detail how Gingrich’s energy agenda wouldn’t fix gas prices but would hasten a climate catastrophe. Yesterday, Michael Ettlinger, Vice President for Economic Policy at the Center for American Progress Action Fund, explained why eliminating the capital gains tax “would in fact be a disaster for the market.”

Today, guest blogger Ed Paisley, Vice President for Editorial at the Center for American Progress Action Fund, explains why Gingrich’s “mark-to-market” proposal — embraced today by conservatives in Congress — would also be disastrous.

Former Speaker of the House Newt Gingrich the other day made the claim that mark-to-market accounting — the kind of free market-oriented accounting rule he and other conservatives should love — is at fault for the collapse of our financial institutions. In fact, it was a lack of government oversight — cheered on by conservatives like Gingrich — led us to this financial crisis. Now Gingrich wants us to compound the problem by removing market transparency.

Presumably, free marketeers would want commercial and investment banks to account for the value of their assets according to their value in the open market — what is known as “mark-to-market” accounting. Otherwise, how can we know what the true value of those assets are? And what better way than market-based accounting rules. That was the reasoning behind the decision last year by the Financial Accounting Standards Board to introduce mark-to-market accounting.


Gingrich — and now the conservative Republican Study Committee in Congress — want to end mark-to-market accounting for long-term assets as part of their alternative to the $700 billion financial rescue package proposed by Bush administration Treasury Secretary Henry Paulson this past weekend. Gingrich and the RSC claim that no market exists for long-term assets such as mortgage-backed securities to be priced in.

That’s wrongheaded policy on two counts. First, as equity strategist Christopher Woods, an expert on the reasons behind Japan’s two-decade long economic funk, pointed out recently in the Wall Street Journal, pretending that the value of long-term assets are more valuable than the market says they are would result in financial institutions “warehousing bad debts, Japan-style.” Presumably, conservatives don’t want to engineer the non-recovery of our economy akin to what Japan has suffered since the collapse of its real estate markets in the late 1980s.

Second, the secondary market is in fact accurately pricing the value of mortgage-backed securities. Merrill Lynch & Co in July sold $30.6 billion worth of this kind of debt earlier this year at 22 cents on the dollar — probably an accurate price given that the structure of these and almost all other mortgage-backed securities. These securities contain a complex mix of mortgages (and slices of mortgages) from across the country and from a mix of residential housing. Their price reflects the value of this mix of mortgages as a package, which is exactly what all the other mortgage-backed securities contain.

That’s why the U.S. Treasury as part of the $700 billion rescue package needs to purchase troubled mortgage-backed securities in such a way that individual troubled mortgages bundled in these securities can be separated from perfectly solid home mortgages across the country. Treasury can sell the good mortgages back into the market, securing a return for taxpayers, and restructure individual troubled loans so that stressed but responsible homeowners can remain in their homes and avoid foreclosure. Treasury can then also sell these restructured mortgages back to the market once the U.S. housing market recovers.

Mark-to market accounting would then reflect the true value of the U.S. housing market, and the U.S. financial institutions wouldn’t need to follow in the footsteps of Japan, pretending bad assets are good and in the process dragging down our economy.