Academic

Tomorrow the SEC will host a roundtable required by the recent bailout legislation to discuss mark-to-market accounting.  My guess is that much of the talk will focus on the costs and benefits of accurate reporting, concentrating on the potentially damaging effects of having to make financial reports based on temporarily ?distressed? market prices.  Such a discussion will entirely miss the point.

The SEC needs to consider market-to-market rules in the broader context of the various types of investment practices that can either increase or decrease market instability.  We need to acknowledge that this is more than just an accounting issue.  While mark-to-market, as with margin calls, can cause severe market declines, their proper regulation should focus on modifications which make it less likely that both the price of and demand for risky assets will fall together in the future.  In 1934 Congress saw the problem deeply enough to avoid shooting the messenger, and increased margin requirements rather than restrict margin calls.  Let?s hope that the discussion at the SEC roundtable will lead to a similarly thoughtful response.