The way things are going in Washington and Wall Street, we fully expect a decree from Congress that henceforth all photographs and mirrors will be outlawed.Why on earth would they do that? Well, it turns out that various powerful individuals are growing dissatisfied with their diet and personal fitness programs. They are growing a bit paunchy around the middle, and they're picking up wrinkles, while more of their scalps are showing than they would prefer.

So, in order to keep those things from happening, they want Congress to banish all mirrors and photographs. They figure if they can't see themselves as they have become, then neither will anyone else.

And isn't that dumb?

MARK-TO-MARKET BAN?

As nonsensical as that short fable might be, it parallels the outcry from Wall Street and Main Street bankers, and their pet members of Congress, that has vacuously blamed mark-to-market accounting for the stress on investment portfolios and on the managers who were and are supposed to be managing them.

Their so-called logic goes something like this:

* Perfectly good investments in mortgage-backed and other risky securities didn't behave as expected.

* Accounting rules require changes in investment values to be reported in the period in which they occur.

* The write-downs made it look like the banks are in bad shape.

* That appearance spooked the markets, with the result that their stock values declined.

* The decline in bank stocks made the whole market even more jittery and triggered more declines in mortgage-backed securities and stock values.

Therefore, all that's needed to bring stability to the markets is to rein in the accountants so bankers can start accounting for investments on the basis of what they want them to be worth, not what they are worth.

If there weren't so many people making these sorts of claims, we wouldn't be writing. In addition, their analysis of the issues and their placing the blame on accounting rules is (to drain our thesaurus) ridiculous, ludicrous, preposterous, absurd, silly, outlandish, outrageous, bizarre, nonsensical and otherwise unbelievable.

Except, of course, for the fact that this movement is somehow gaining traction.

THE BIG IRONY

What's really ironic about this hullabaloo is that the opponents to mark-to-market are acting like it was only recently made part of GAAP. They're flat wrong, because it's been required for investments dating back to SFAS 115, which was issued 15 years ago in 1993!

What they are confused about is that the Financial Accounting Standards Board recently issued SFAS 157 to bring rigor to how market values are measured. This suggests to us that some organization started a chain e-mail with a big mistake in it. Shame on whoever it was and all who have repeated it.

WHO'S COMPLAINING?

It's no surprise that all the complaints have been coming from those whose balance sheets now look so much worse. In a Washington Post article from Sept. 23, 2008, "Wall St. Points to Disclosure As Issue," writer Carrie Johnson opened with this sentence: "Wall Street executives and lobbyists say they know what helped push the nation's largest financial institutions over the edge in recent months. The culprit, they say, is accounting."

She quoted Ed Yingling, president of (no surprise) the American Bankers Association, as saying, "The accounting rules and their implementation have made this crisis much, much worse than it needed to be. Instead of measuring the flame, they're pouring fuel on the fire."

She also cited opposition from another group: "Lobbyists have been seeking temporary relief from the accounting measure, which they say establishes bargain-basement prices for assets that would be valued far higher during more normal trading conditions."

As another example, the Post article also quoted former FASB chair Dennis Beresford, who offered this debatable analysis: "It's intended to be more or less for orderly markets, but we don't have orderly markets these days. It's not so much that mark-to-market has people complaining, but marking to a particular market."

We wonder where Denny is coming from.

Mark-to-market is intended to convey the full truth in all market conditions, whether up or down, volatile or stable, orderly or chaotic. It's possible he was misquoted, of course, but we're afraid these words will encourage bankers to rationalize not marking to market but to other bogus amounts that would reflect their optimistic wishes, instead of real, observed numbers.

In addition, we've heard other silly things. For example, on the September 23 edition of the Dave Ramsey Show on Fox Business News, a guest banker not only asserted that mark-to-market accounting was the source of the problem, but also claimed that it was created and required by Sarbanes-Oxley. Ramsey nodded sagely and agreed with the guy. We sent an e-mail to him comparing his suggestion that mark-to-market be "temporarily suspended" as comparable to telling people with huge credit card debt to overcome the problem by not opening their bills. (We're not expecting a reply.)

Here's what these people are saying: "Under normal conditions, we all used to be slim, muscular and very good-looking. We don't need to be told that we've lost those qualities. We still have them, trapped inside our bodies. Don't make us look in the mirror, and please look in the photo album to see what we looked like before middle-age spread hit."

WHO ISN'T COMPLAINING?

Maybe it's just us, but we haven't yet heard any complaints about mark-to-market accounting from those who use financial statements. If it's so misleading, why hasn't the CFA Institute denounced it, for example?

In fact, Jeff Diermeier, the CFAI president and chief executive, released a long statement on bailouts on September 23. Not a single word suggested mark-to-market is a culprit in the crisis. In fact, he described one part of the solution with these words: "Greater transparency of investment portfolios is an important tool that will allow regulators to discourage manipulation and diagnose financial ills in our increasingly complex financial world."

That comment certainly does not suggest mark-to-market accounting is even a small part of the problem, much less the root of it all.

WHAT'S THE GOAL?

We've said this a thousand times, but we'll say it again: Mark-to-market accounting is useful because it reveals more about the amount, timing and uncertainty of future cash flows. By revealing, for example, that a company's investment portfolios have greatly increased or decreased in value, it makes it clear that management has made risky investments.

There is a difference between buying mortgage-backed bonds and insured CDs from the neighborhood savings and loan, and that difference is riskiness, which is manifested in variable outcomes. The CD simply plods along, accruing interest slowly but surely. The bonds, on the other hand, just don't behave like that.

The bankers can't have it both ways. They can't take all that risk and report as if they have no exposure whatsoever. They thought they could and now they don't want to face the music. They took the risk, they didn't mitigate it through hedging, and now they're standing naked where everyone can see their folly. They would prefer we not see their condition, and they're in denial by not realizing that the markets know exactly what they're up to.

Here's why the bailout plan was needed: The banks are really strapped because they took on all that unhedged risk, despite being leveraged with debt equal to 95 percent to 98 percent of total assets. If their assets decline in value by only 2 percent to 5 percent, their net worth is wiped out and they're insolvent.

This is a time for heroic confrontations with reality and for bold new strategies to regain stability. It is absolutely no time to refuse to assess the damage.

M-T-M SHORTCOMINGS

With candor, we also see some major shortcomings in mark-to-market accounting. For one, it isn't applied widely enough; we would sweep all assets and liabilities into it and let the full truth be known. For another, we would eliminate the half-hearted GAAP approach that moves gains and losses off the income statement into other comprehensive income on the balance sheet.

In the meantime, we suggest that you look in a mirror and figure out whether you need to watch what you eat and start getting proactive about your exercise. And then get out there and fight for truth in accounting.

Paul B. W. Miller is a professor at the University of Colorado at Colorado Springs and Paul R. Bahnson is a professor at Boise State University. The authors' views are not necessarily those of their institutions. Reach them at paulandpaul@qfr.biz.

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