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Home > Blogs > Ian Fraser > Mark-to-market a cure, not a cause, of crisis

Mark-to-market a cure, not a cause, of crisis

Finance Blogger: Ian Fraser Ian Fraser

By Ian Fraser in Doha

It is wrong to blame fair-value accounting, also known as mark-to-market accounting, for causing the financial crisis that last year nearly tipped the global economy over the edge, according to the chairman of Goldman Sachs Bank USA, Gerald Corrigan.

Also a managing director of Goldman Sachs & Co, Corrigan said: “I do not believe that fair value accounting was the cause of it.”

In his role as co-chair of Goldman Sachs’s firm-wide risk management committee in the run up to the crisis, Corrigan said clearly that, despite its complexities, fair value accounting “serves as a powerful early-warning system.” He said it could only provide such a service if it is used correctly, with daily mark-to-market pricing of everything on a bank’s balance sheet. It’s a point Lloyd Blankfein, chief executive of Goldman Sachs has also rammed home since the crisis erupted last year.

Echoing calls from standard setters such as the Financial Accounting Standards Board and the International Accounting Standards Board, Corrigan added: “Over time we should be working towards a system where fair-value accounting has a larger and not a smaller role.” However, this is going to be an uphill struggle for the likes of Corrigan since politicians, particularly in continental Europe and the US have villainized fair-value accounting as a major contributor to the crisis, arguing that you cannot mark certain instruments to market when a market for these does not exist.

Speakers at the launch event for QFINANCE in Doha, titled the “FT Rethinking the Future of Finance” conference, said one of the clear lessons from the crisis was that central banks should have a bigger and not a lesser role in the regulation of financial markets.

Corrigan said: “One way or another the central bank has to be involved in the regulatory process.”

He said they deserve such a role because they are the lenders of last resort and therefore have to pick up the pieces in the event of things going wrong. They also have a “unique vantage point” on what’s going on in financial markets “because they are the only public policy institution that is involved in the financial markets on a daily basis,” said Corrigan.

Corrigan was a senior US regulator with the Federal Reserve Bank of New York until 1993, where he served 25 years latterly as president and chief executive officer. As such he is described by some as “a gamekeeper turned poacher.”

He also believes non-executive directors on the boards of banks and other financial institutions “should make it their business to insist on higher standards of corporate governance within their organizations. They should ensure that risk managers are totally independent of sales trading and deals people. If that independence does not exist and if sales and trading people are allowed to contaminate the thinking of risk and control personnel, then you’re going to have trouble. You can bet the ranch on that.”

Post-crisis it has become clear that the boards of certain banks, including HBOS, did little to ensure such distinctions were made. This became apparent following submissions to the Treasury Select Committee banking inquiry, notably from former HBOS head of group regulatory risk Paul Moore who was fired after he sought to alert the bank’s board that the bank was on a self-destructive course.

HBOS effectively failed in September last year and had to be rescued by the UK government.

Tags: central banks , fair-value accounting , financial crisis , regulation
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