October 22, 2008
As the mark to market rules were originally implemented the negative effect to corporate balance sheets during periods of illiquid markets was not fully appreciated and we are suffering the disastrous consequences of this action. Had we had mark to market accounting in place during the early 1980s when most of our large commercial banks were heavily invested in world debt we would have likely seen many bank failures. Thankfully, the debt was largely carried at cost and paid over time resulting in no balance sheet capital implosion and no financial crisis. If adjustments to carrying cost are required for assets that are performing, Id suggest using a present value methodology using discounted cash flow and an appropriate historical risk premium rather than relying on quotes from illiquid markets.
Over the past 18 months many SECs rules have created increased volatility in our public markets and stress in our financial system. Mark to market is just one such rule. Removal of Rule 10a-1 in July, 2007 allowing short selling at the market without an uptick is another. The tragic footnote to removal of this rule is that it had been put in place by Congress in the 1930s to protect the public from abusive short sale practices known as bear raids, and at the very time its now most needed its gone. Another rule change in 2007 contributing to market volatility was removal of NYSE trading curbs on program trading.
I know all of the above changes have created unintended consequences but consequences none the less. I urge the SEC to quickly move to correct these regulatory deficiencies to promote market stability and investor confidence.
Sincerely,
Michael Sigmon