Problem: The other part of what happened was an explosion of complex financial instruments that weren’t particularly well understood by even the most sophisticated banks, lenders and hedge funds. To make matters worse, these instruments - which basically bundled together mortgages and sold them to others to spread risk throughout our capital markets - were mostly off-balance sheets, and hidden from scrutiny. In other words, the housing bubble was made worse by a series of complex, inter-connected financial bets that were not transparent or fully understood. That means they weren’t always managed wisely because people couldn’t properly quantify the risk or the value of these bets. And because these instruments were bundled and sold and resold, it became harder and harder to find and connect up a real lender with a real borrower. Capital markets work best when there is both accountability and transparency. In the case of our current crisis, both were lacking.
Alright, so I am willing to buy in to this idea. Accountability and transparency are important, what McCain says here is ostensibly correct.
Solution: I am prepared to examine new proposals and evaluate them based on these principals. But I think we need to do two things right away. First, it is time to convene a meeting of the nation’s accounting professionals to discuss the current mark to market accounting systems. We are witnessing an unprecedented situation as banks and investors try to determine the appropriate value of the assets they are holding and there is widespread concern that this approach is exacerbating the credit crunch.
Whoa... seriously, for those of you who aren't financial market nerds allow me to translate. Basically, what McCain has proposed is akin to saying that because the police department has a crippling lack of transparency we should get rid of internal affairs. Mark to market accounting basically forces companies to value their holdings based on their current price, rather than at some speculative future price. The practice of valuing holdings based on speculative price was instrumental in disasters like Enron and WorldCom. It eviscerates transparency because it varies the ways in which owners of complicated financial instruments can account for those instruments and present them to the market. In other words, John McCain's solution to overly complicated market instruments is to make them more complicated. Sigh...
