Wednesday, March 11, 2009

U.S. Senator Johnny Isakson (R-GA)
Floor Statement on Mark-to-Market Accounting Rules
Remarks as Delivered on the Senate Floor

Mr. President, first of all, I wish to commend the distinguished Senator from New Hampshire. As a Member of the Senate, there are many people I look to for wisdom and knowledge, and Judd Gregg is one of them. In my hometown of Atlanta, GA, there is another person I look to for wisdom and knowledge, and that is my barber, Tommy.

I got a haircut, as you can probably tell, on Saturday. I was at Tommy's Barbershop on West Paces Ferry Road and Northside Drive in Atlanta. While in that barbershop, I talked to a real estate broker, a stock broker, a pension fund manager, and a good old, average, everyday American retiree trying to figure out how he is going to make it on what the markets have done to him in the last year or so.

It is ironic--and I had no plan to make this speech behind Judd Gregg--but they talked to me about only two things. The first one was debt because last Saturday was just a week after the announcement of a $3.6 trillion budget, a 20-percent increase; an increase in taxes and concern because at a time of economic peril America is bearing more and more and more.

The other thing is what I rise to talk about today. We have looked into the mirror to look for the enemy, but we have avoided looking at ourselves. For a second I wish to talk through regulatory policy. I am talking about both administrations: the end of the Bush administration and the beginning of the Obama administration. I think we have been missing the mark. I wish to share some real-life stories about real-life Georgians that indicate where mark-to-market accounting is going in the United States of America, the businesses of the United States of America, and the people of the United States of America.

Some of my colleagues have watched television and watched the AFLAC duck commercials. I think they are the best commercials on television. I also think AFLAC is one of the finest companies in the United States of America. When we consider AFLAC and Dan Amos, the CEO of AFLAC, he put in stockholder consent and stockholder advice on his compensation and repealed his own golden parachute. All of those things we all complain about CEOs doing, he did it right. But stock has plummeted in AFLAC. Do you know why? Because of the FASB rules on mark to market, his core asset base, which is long-term assets, held to maturity, to protect against insurance commitments AFLAC has made, are now being marked to market, meaning assets worth something are being marked worth nothing. So the stock has gone down because the evaluators say the footings on the asset side of the ledger sheet aren't looking as good because of the mark to market. Let me explain the best I can what that really means.

Mortgage-backed securities are one investment a lot of life companies and other industries bought to put on their asset sheet to offset obligations they have off into the future because those securities have maturities corresponding with the maturities of the loans embedded within them of anywhere from 7 to 30 years. When the subprime market started failing last year, Merrill Lynch, in a crisis mode last July, sold its subprime securities to get rid of them; it financed the sale and sold them for 22 cents on the dollar. Under the FASB rules, assets worth 70 or 80 or 90 percent were marked down to 22 percent. That lowered the asset side of the ledger and made the stability of the company look--and I underline that word "look''--worse, when, in fact, those assets, held to maturity, would not be anywhere near the value.

Here is a good example of that: Let's just say I bought a mortgage-backed security, a subprime mortgage-backed security, backed 100 percent by 30-year mortgage loans made in the State of Nevada--every one a subprime loan. Nevada has the highest foreclosure rate of any State on subprime paper. Seventy percent of those loans in Nevada today are paying right on time; 30 percent are in default. Yet, because of mark to market, that security is not marked at 70 percent, which it is performing at, but at zero because at a given point in time today you can't sell it. It is being held by the institution as an offsetting asset to a liability over a term of maturity.

At Tommy's Barber Shop, I ran into a pension fund man and an insurance guy, and they said: Why in the world don't we look for accounting on mark to market like we looked at the pension crisis in 2004?

We have short memories in the Senate. In 2004, because of the declining stock market in 2001 and 2002, there were a number of defined benefit plans in America that underfunded. Because of the accounting rules that were being enforced at the time, those institutions were asked to write checks to fully fund the pension funds when, in fact, not everybody is going to retire the same day but over a number of years.

What did we do in the Congress? With Senators Kennedy, Enzi, myself, and others, we passed the Pension Protection and Reform Act. We said: If your pension fund's corpus becomes underfunded, if you cannot meet your obligation, we will let you smooth that investment, or amortize it, over 4 to 6 years. In the case of Delta, which was in trouble at the time, they had a $900 million shortfall in their pension fund. But because of smoothing, instead of having to put $900 million in in 1 year, they did $150 million over 6 years. Delta is the most profitable airline in the United States today. They would not exist today had it not been for the smoothing.

Mr. President, in conclusion, I hope everyone will visit their "Tommy's Barber Shop'' and look at what we are doing that may have the unintended consequences of exacerbating the economic problem for the average American today and for Tommy the barber.