At the National Press Club on Tuesday morning, former Speaker of the House Newt Gingrich proposed his solutions to the financial crisis, which include suspending “mark-to-market” accounting.
“If I were in Congress, I would have reluctantly and angrily voted for it,” Gingrich said of Monday’s failed bailout bill.
However, he said, the banks will be back for another bailout unless real change is implemented.
As Gingrich explained, mark to market accounting means that companies must value their assets based on market indicators of the price that those assets could be sold at immediately. Moreover, “when a company in financial distress begins firesales of its assets to raise capital to meet regulatory requirements, the market bottom prices it sells out for become the new standard for the valuation of all similar securities held by other companies under mark to market.”
“Under such a rule, declining housing prices don’t just reduce the value of defaulting mortgages,” Gingrich wrote on Forbes.com on Monday. “They reduce the value of all mortgages and mortgage-related securities because the housing collateral protecting them is worth less. This has begun a downward death spiral for financial companies large and small.”
Gingrich’s proposal is supported by several experts. Steve Forbes believes that mark to market is causing securities to be marked below value. William Isaac, former head of the Federal Deposit Insurance Corporation, says mark to market would have had disastrous effects during the 1980s credit crisis. “Regulators must evaluate the assets on the basis of their true economic value,” Isaac wrote in the Wall Street Journal last week. “If we had followed today’s approach during the 1980s, we would have nationalized all of the major banks in the country, and thousands of additional banks and thrifts would have failed.”
Isaac has no doubt that this would have moved the economy from a serious recession to a depression.
Luckily, suspending mark to market doesn’t require legislative action.
“They don’t have to wait for Congress,” Gingrich said. “Today, the SEC should suspend this practice. And I do mean today.”