Add Another Prominent Voice To The Write-Up Bandwagon

I belong to the group that thinks that financial institutions writing down a lot of assets due to mark-to-market pricing are going to end up with mark-to-market gains in the future. The market still doesn't buy that (mostly because of incompetent accountants in love with fair value accounting) but we shall see. Add Frank McKenna, deputy Chairperson at TD Bank (one of the big Canadian banks), to the side that expects reversal of the marks:

“This quarter, we're going to see massive continuing writedowns in the financial services sector, but over the next number of years we're going to see the pendulum swing up entirely the other way and we're going to see massive writeups, I would submit, as markets unfreeze and as the value of some of these underlying assets are shown to be worth a lot more,” Frank McKenna told a conference of finance professionals in Toronto.

TD Bank really hasn't really taken any big write-downs related to the credit crisis so it's reassuring to hear someone from that organization expect reversal of the marks (one can't claim this is a self-serving opinion for the bank.)

“There's going to be a very serious look at accounting rules, particularly mark-to-market rules in the United States,” Mr. McKenna said. “A lot of people feel that the crisis has been accelerated by mark-to-market accounting, and that when there's no real market - because the market has seized up - using mark-to-market creates a false impression.”

Other bank executives have been pointing to this issue in recent months. Royal Bank of Canada chief executive Gordon Nixon recently told analysts that “one of the big questions is how much of the writedowns are mark-to-market issues - rather than permanent impairments - and therefore will eventually be brought back into earnings.”

The accounting profession seriously needs to look at themselves in the mirror. So far, no one has really criticized them to any appreciable degree. All the blame and attacks have been directed towards rating agencies, investment banks, bond insurers, and some even blame the investors. If my expectation (similar to Frank McKenna above) comes true, accountants would end up destroying hundreads of billions in damages by forcing capital raising at depressed values. It's really difficult to cause billions in damage but accountants, like politicians, are capable of it.

If my view turns out to be right, fair value accounting will end up becoming a joke just like Efficient Market Hypothesis (EMH). That is, something that seems fine theoretically but completely wrong in real life--especially during stressful times. It may make a lot of sense to use market prices to value things but it completely falls apart when there is no bid. I think it's notions like these that separate investors from non-investors (e.g. accountants, economists, etc). One of the first things an investor--successful or not--will learn from the markets is that psychology plays a huge role. But those detached from investing, such as accountants or economists, often don't put the same weight on such factors.