I read a book about accounting this summer. Everyone should.
The book was by now-notorious short seller David Einhorn. It's called Fooling Some of the People All of the Time. It was mesmerizing. And I say that as someone who looks back on university-era accounting courses as a low point in my life.
I highlight Mr. Einhorn this morning because his tale of an investment in troubled lender Allied Capital perfectly sums up the debate over accounting rules that is now raging in Washington.
There's a segment of the political and banking world that wants to toss out mark-to-market accounting rules, on the logic that they create those nasty, inconvenient writedowns. Allied Capital stubbornly refused to write down the value of some of its loans.
There's a growing constituency telling regulators and politicians to leave mark-to-market accounting rules just as they are, thank you very much. That group would include the Center for Audit Quality, Council of Institutional Investors and the CFA Institute - which captures America's public company auditors, institutional investors and chartered financial analysts. This would also be Mr. Einhorn's preference.
There is no debate over the real financial pain that can result when the value of a illiquid, complex security has to be pegged in a market plagued by unprecedented chaos. But the alternative to pain is denial, or worse.
Trust me accounting - allowing banks and other financial players flexibility in setting the values of securities they hold - isn't likely to solve the credit crunch. It's just going to make it worse. It creates an enviorment rife with uncertainty, and open to fraud. For proof, just read Mr. Einhorn's book. Or leaf through "When Genius Failed," the definitive work on Long Term Capital Management's fall, or ''Conspiracy of Fools,'' the engrossing story of Enron's fall.
With the U.S. government now getting its act together, and preparing to absorb up to $700-billion worth of troubled financial products, there's never been a greater need for tough accounting standards. Anyone who thinks otherwise isn't doing enough reading.