On Oct. 8, 2008, investors were desperate to understand why stocks were cratering and banks had quit lending. It was the height of the financial crisis. That day William Isaac, a former chair of the Federal Deposit Insurance Corporation, went on television and blamed an unlikely culprit: bankers’ accountants. “The Securities and Exchange Commission has destroyed $500 billion of bank capital by its senseless marking to market of these assets for which there is no marking to market,” he said. “That has destroyed $5 trillion of bank lending.” In other words, accounting rules enforced by the federal government were at the heart of the then-unfolding financial catastrophe. Many bankers and investors shared Isaac’s view.
By contrast, government accountants, led by the Governmental Accounting Standards Board (GASB), have embraced these same rules -- known as “fair value” accounting -- with the same enthusiasm that bankers’ and investors’ accountants have scorned them. In fact, during the past three years the people who write accounting standards for states and localities have made fair value a key factor in how governments manage their pensions, investments and retiree health care. Strange as it might sound, that’s a good thing.