Mark To Market Accounting

With all the controversy swirling around "mark to market" accounting these days, it is interesting to note that Jeff Skilling and other senior officers at Enron lobbied aggressively to be able to use this method for doing their books. The SEC approved and Arthur Anderson signed off on it. Essentially this allowed Enron to book future (i.e. "imaginary", "theoretical") profits from deals immediately after they were signed; which meant that as far as the public was concerned, Enron's profits were whatever Enron wanted them to be and said they were.

In the definitive documentary film on Enron's demise, "The Smartest Guys in the Room", Skilling is seen in conference with other Enron officers jesting about switching from market to market accounting to HFV; in Skilling's words, "hypothetical future market value" accounting, enabling the company to add "...a ka-zillion dollars to the bottom line." In effect he was having a private laugh at the accounting stunt they had just pulled off on the SEC and on the investing public.

Ha-ha. Well we all know how Enron worked out in the end. Yet since the demise of Enron, major financial institutions on "Wall Street" have created investment and trading vehicles so complex that no one- including the people who cobbled them together, really knows how much they are worth. The days of "whatever we say they are worth" died with Enron, and accountants the world over saw what happened to Arthur Anderson.

So while the financial wizards on "Wall Street" have pressed for their more exotic assets to be "marked to model", their accountants and the Treasury have been insisting that they be marked to market, forcing these institutions to take massive write downs. It's ironic how this accounting method helped Enron create new businesses such as trading bandwidth and generate obscene, albeit phantom profits has also been the undoing of so many Wall Street firms in the past few months.

Yet just as it was reckless in the extreme to allow Enron to book future profits as if they had already been realized, so too is it reckless to force so many companies to mark their investments to market at what amount to "fire sale" prices. One has to hope that this is being done on a case by case basis; that the toxic sludge on corporate balance sheets is being written down or off, but that the legitimate investments companies have made that have simply cratered along with the rest of the market will be recognized and allowed to recover.

The smartest guys in the room? That's also what people said about the principals at Long Term Capital, which imploded just over 10 years ago.