Given the degree to which the angst and anger about the economy is based on the public's confusion about the financial world -- just what is a "retention bonus," anyway? -- this might be the right moment to focus on something simple.
Yes, I'm talking about bank accounting.
Just kidding. Bank accounting is fiendishly complicated. Bankers have always preferred it that way, for it makes it easier to pretend that their institutions are solvent when they're not.
Their pretense is important because the most valuable asset bankers can own is the confidence of the public -- which, as Adam Smith observed in "The Wealth of Nations," is worth its weight in gold and silver.
At the moment, confidence in bankers is at a low ebb. The only thing keeping mobs of depositors from the banks' front doors braying for their money is federal deposit insurance -- and even that hasn't kept customer panic from bringing down such weakened institutions as IndyMac Bank.
So it's unsurprising that in an effort to restore confidence, bankers will try anything. One of their main thrusts is to press for a change in their accounting rules, which they say make some banks look sicker than they really are.
Curiously enough, they may be right.
Banks may be heading into a cycle of terrific profitability, in part because they currently enjoy a low cost of capital and the credit support of the federal government. Chastened by the excesses of the recent past, they are taking care to make only the most solid, and therefore profitable, loans going forward.
The top banks' "earning power . . . has never been better on new business," Warren Buffett told CNBC a few weeks ago. Just last week, a group of the savviest investors on Wall Street took over IndyMac, convinced that billions can be made from "old-fashioned banking," as one executive put it. (Especially because the FDIC will eat more than $10 billion of IndyMac's past losses.)
All that stands between them and Nirvana, the banking industry says, is an accounting rule requiring that they put the absolute worst face on their most questionable loans. Allow them to apply just a bit of rouge and glitter, they say, and they'll once again be the belles of the financial ball.
This brings us to the concept of "mark-to-market" accounting. If you haven't heard this term before, brace yourself, because you'll be hearing it a lot over the next month or so.
