It's great fun to be a private equity master of the universe. For one thing, you get to say stuff like "“I’m not a bank, I’m a user of banks,” during closed-door meetings at the G-20 Summit.
The quote comes from Steven Schwarzman, chairman and chief executive of the Blackstone Group. The context: Remarks concerning why it does not make sense to apply mark-to-market accounting standards to hedge funds.
In fact, Schwarzman doesn’t think mark-to-market accounting standards are such a great idea for banks either. In his words:
“'When you have an asset that goes up and down' and “'it’s money good in any case,'…“to have that market, sometimes it’s not a deep market, crash that asset, and destroy the capital of the banking system and create a panic, seems to me to be on its face completely unwise, but we’re still doing it.”
Schwarzman, also points out, with a historical flourish, that we've tried mark-to-market accounting in the United States in the past—prior to the Great Depression:
"Now, in the United States, we eliminated mark-to-market accounting in 1937, and why did we do that? We completely bankrupted our system before, and for some reason, somebody who liked something called transparency decided to have mark-to-market accounting come back, around the turn of the last century. So it in no way surprises me that we had a catastrophic collapse as a result of implementing mark-to-market accounting."
It's certainly an interesting parallel.
In a prior New York Times article, Schwarzman was quoted saying that mark-to-market accounting has the potential for “accentuating and amplifying potential losses.”
Schwarzman certainly isn't alone in his thinking on that point. Not surprisingly, economists have looked at this issue in the past.
The worst-case version of the mark-to-market scenario is the "loss spiral". This is essentially a positive feedback loop where assets are written down, then sold at fire sale prices to meet certain regulatory requirements. It's a positive feedback loop, because the system reinforces itself: paper losses trigger sales, which in turn trigger more paper losses – and the cycle continues.
And that, as you might imagine, benefits no one: Not banks, their customers and trading partners, tax payers—or the economy at large.
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