U.S. Relaxes Its Mark-to- -Market Standards

No matter how it looks, it’s still walking on a tightrope. We should discuss these selfish policies.

I was able to visit New York, the epicenter of the financial crisis, this April. My older brother, who practices law in Germany, was an apprentice in America for one week over ten years ago, and has since visited New York almost every year. New York, briskly prospering from the IT bubble, while repeatedly falling victim to panic at the same time; each time he saw the center of the world economy.

This time, he visited a New York recovering from the financial crisis. In the middle of Easter, centers like Times Square and Fifth Avenue were full of bustle. However, if you leave the island of Manhattan, you see a surge of people who have lost their homes to foreclosure who are now living in tents.

Susumu Tokunaga, who has been running a real estate business in New York for thirty years said, “There is almost no buying, selling or leasing. Now it’s like being in the midst of a hurricane.” In the center of Manhattan, the rent for condominiums is expensive, and there are many investment bank employees, but the financial crisis has caused more contracts to be terminated. In the past, when collecting capital from investors from all over the world, the price of Manhattan’s condominiums has as much as tripled in one hour. With no buyers, the transaction cost has not been fixed until now. To America, like the bursting of Japan’s economic bubble, it was as if the financial crisis arrived in one stroke.

The most discussed topic on Wall Street, the center of finance, is the mark-to-market accounting standard alleviation. On the balance sheet from the period of January to March 2009, most American financial institutions were found to have ended in the black. However, the truth is that this was the result of standard mark-to-market accounting relief and accompanied by the fact that the number of those going into the red due to delinquent assets had decreased.

Even in Japan, there are many corporate managers who are sensitive to mark-to-market accounting. In July 1999, at the editorial department of the "Economist," I participated in the editing of a special issue titled “Finance Revolution.” At the time, Japan was in the vortex of a financial crisis symbolized by the bankruptcies of San’ichi securities and Japan's long-term credit banks. On the other hand, America was welcoming the peak of the IT bubble when I heard Wall Street comments like “the Japanese stock market is like a minefield.” The consensus was that Japanese companies were smack full of accounting fraud and were frightened to invest. Accordingly, there was pressure from America to increase the transparency of city markets, which led Japan to introduce mark-to-market accounting from its account settlements in March 2001.

Ironically, America, with its critical comments like “the Japanese market is a minefield,” has this time fallen into a financial crisis, and in an act of betrayal, has turned to mark-to-market accounting standard mitigation.

Of course, even Wall Street had many questions as to whether the transparency of the banks' financial affairs under mark-to-marketing accounting mitigation would be maintained. One portion of the financial institutions will even wait and see whether to hire new employees.

Japanese who are working for American investment banks ask whether mark-marketing accounting standard mitigation is selfish. In response, they are told “You don’t understand. This is the American standard.” It is clear that the system will be changed to maintain the competitiveness of one’s own country. The “American Standard” is still going strong. It is not because of mark-to-market accounting that management exists. Rather, it is because of management that accounting exists. And if the economy recovers, the Americans will say “We are the world’s standard; the way that foreign countries do it is wrong.”

In the midst of a financial crisis, Japan introduced mark-to-market accounting. Moreover, the banks and corporations, loathing the losses that accompany change, moved to sell all their stock holdings at once. In April of 2003, the average stock price in Japan sunk to its lowest since of the end of the bubble economy. Businesses that had lost strong stock holders, like the Murakami Fund, became targets for shareholder activists. However, with the introduction of mark-to-market accounting mitigation, the disposal of banks’ bad loans progressed, and considering that the economy was able to make a comeback afterwards, we can have a positive assessment of the results.

This time however, America’s introduction of mark-to-market accounting standard mitigation comes at the worst possible time. It seems that America only looked at the results of Japan’s precedent, which had invited stock prices to decline. That alone will worsen America’s financial crisis. Regardless of appearance, it is still walking on a tightrope.

From the view of Japan’s political and financial world, America’s mark-to-market accounting standard mitigation is ten-odd years of hearing “America is everything.” And considering the academic world’s devotion to America, they will surely be disappointed as well. But this time, America’s selfishness will not just be “somebody else’s problem.” To Japanese banks, which due to the recovering economy and their opposition to hostile takeover were thus able to stabilize stock prices, a new lowering of stock prices would inflate losses and damage balance sheets. The danger that they will once again fall into a management crisis also cannot be denied.

Taking the lessons from end of the Japanese-U.S. bubble into consideration, there should be more serious discussion about whether accounting mitigation should be done during a time of financial crisis.