2/28/2008: Fed Chairman Ben Bernanke comments on mark-to-market accounting

Transcript of an exchange between Senator Charles Schumer and Fed Chairman Ben Bernanke on 2/28/2008 during The Semiannual Monetary Policy Report to the Congress before the Senate Committee on Banking, Housing, and Urban Affairs (starting at approximately the 1:46:45 mark). The exchange concerns the role that mark-to-market accounting has played in the present credit crunch.

Schumer: [My first question] involves the sort of combination creating problems now of marking to market and the credit crunch, freeze, call it what you will. You know, when I first got here on the Banking Committee, banks really didn't mark to market. And we regarded it as great progress that they now have to mark to market like securities firms and other always did. It's a proper valuation of their assets. The problem here is nobody knows how to mark to market because there is no market. In too many areas no one's buying. And so you don't what they do and they make a valuation. I've heard from many people that they make that valuation artificially low. And that further exacerbates. It's a vicious cycle because then they don't have the capital, they can't do any more lending, and everything's frozen up. Is there a way to deal with that problem now? Is there a way to say yes you have to mark to market, but in these unusual circumstances, you can do it 6 months from now or something to that effect? Quarterly, yearly? I am not an expert here, but I do know it's a real problem. How do you mark to market when there is no market? And that, because there's no market, rare, has almost never occurred in such large parts of the credit market before, is this an unusual circumstance where this doesn't work?

Bernanke: … You raise a very good point. The Federal Reserve has long had sort of a mixed view about fair value accounting. We think that market traded assets should be valued at the market price and investors are entitled to know what that price is. But, we've always recognized -- and we had in mind things like bank loans, for example, that are relatively illiquid -- that it might be difficult to value them on a fair value basis and that there would particularly be problems arising there. As you point out, we now have a situation where some assets which are normally tradable are not perhaps generally tradable. The accounting profession has created a system by which -- you know, an attempt to try to get around that problem -- you know, there's these three different levels where you have a market valuation, or a model valuation, or a judgment valuation. I think it's one of the major reasons why we're having -- it's one of the major problems we have in the current environment. I don't know how to fix it. I don't know what to do about it. I think the accountants need to make the best judgment they can.

Schumer: Someone suggested delaying a mark to market, [not?] even using this system until there is a market ... letting, ... cuz you really don't know the value of the asset. And if you under value it, you may be hurting things as much as if you over value it.

Bernanke: I understand your concern, Senator, but the risk on the other side is that if you do too much forbearance or delay mark to mark, the suspicion will arise among investors that you're hiding something.

Schumer: What about a rolling average that takes into account 6 months back?

Bernanke: Senator, I haven't worked through any proposals like that. This is really an accounting board responsibility. I agree there's a severe problem. It's difficult to change the rules in the middle of a crisis.

Schumer: I know.

Bernanke: It's one of those things that we're going to have to put on the list of issues to evaluate as we try to learn the lessons from this experience.

Schumer: But you do admit it's a serious -- it's one of the nubs of the problem now even though it hasn't been talked about that much.

Bernanke: The direction of how to fix it is not at all clear.