The debate over imposing fair-value, or mark-to-market, accounting on financial institutions, in its modern form, has been going on since 1990, when the Financial Accounting Standards Board started discussion about what became FASB Standard 115. But this wasn’t the first time U.S. accounting principles on this topic for banks underwent a fundamental change.

As a 1990 letter from Fed Chairman Alan Greenspan to Securities and Exchange Commission Chairman Richard Breeden states:

“… prior to 1938, banking organizations were required for supervisory purposes to use market value accounting for their investment securities portfolios. Serious concerns on the part of the U.S. Treasury and the bank regulators over how this affected the banks’ financial performance and investment decisions led the agencies to abandon in that year the use of this accounting concept for supervisory purposes.”

An SEC study of fair-value issues, mandated by last summer’s Emergency Economic Stabilization Act, notes in a historical section that prior to the Great Depression it was common for industrial companies to mark up long-term assets such as property, plant, and equipment, as well as intangible assets. In fact, SEC’s first Chief Accountant supported the move away from what was called “current accounting” in favor of the historical-cost accounting approach still used for many purposes today. (FASB came along much later, and historically very few of its decisions have been overruled by SEC.)

In 1938, Comptroller of the Currency Preston Delano warned that: “…the soundness of the banking system depends in the last analysis upon the soundness of the country’s business and industrial enterprises, and should not be measured by the precarious yardstick of current market quotations which often reflect speculative and not true appraisals of intrinsic worth.”

In fact, analyst Brian Wesbury, chief economist at First Trust Advisors L.P., Wheaton, Ill., noted in a recent research report that economist Milton Friedman’s studies found that market-value accounting caused the failure of many banks in the Depression.

“Little known by economic historians,” writes Wesbury, “is that in 1938 President Roosevelt’s

Could presidential history repeat itself?

In an e-mail interview, former Speaker of the House Newt Gingrich, who has been working against further adoption of fair-value accounting as currently structured, was asked if the current debate is one the President can affect. His answer:

“Yes. President Obama and Treasury Secretary Timothy Geithner, as top policymakers, have a unique opportunity to weigh in on this issue. Given that accounting standards are determined by the Financial Accounting Standards Board, which is overseen by the SEC, all of which are guided by Congress, this issue reaches all the way to the top of the legislative and executive branches.”

The significance of mark to market on recovery is noted by Gingrich, who recommends that President Obama and Secretary Geithner make sure that  ”the first provision of their new legislation should be replacement of mark-to-market accounting.”

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