So, let's say there is a confab of all of the great veterinarians of the globe, and they determine that, henceforth, dogs' tails shall be reclassified as legs. Look, it was a fair vote, the right folks agreed, the parties came together in a spirit of bipartisanship, and they got it done for the good of the country (or for dogs).

I ask you, in light of this important yet entirely invented decision, how many legs would a healthy, fully limbed dog have?

Bully for you if you said "four." Because just calling a tail a leg doesn't actually make it a leg.

It is no surprise to most people that (a) the global financial system is a bit of a mess, and (b) our elected and non-elected leaders in many countries around the globe are throwing any strategy they can think of at the problem. One idea that some are pressing the Securities and Exchange Commission to adopt is for it to suspend mark-to-market accounting, essentially overriding the Financial Accounting Standards Board (FASB), which is tasked with setting accounting standards in this country.

It's not just a bad idea. It's a bad idea that sets a bad precedent.

Mark-to-market accounting forces companies to value the securities on their books at the going market rate. In normal times, this gives investors an accurate view of what a company's assets are worth.

Many people are pointing to mark-to-market accounting (also known as "fair value" accounting) as being part of the problem in keeping the American financial system in turmoil. Banks, insurance companies, and other financial institutions have statutory capital requirements, which are being harmed since the market for so many securities is essentially glued shut. If the last sale of some esoteric, asset-backed security for government of Iceland general obligation bonds trade today at $0.05 on the dollar, then every financial institution holding that security must value it on their balance sheets at $0.05, even if they're pretty sure that the Icelanders are going to catch enough cod to pay their bonds in full.

So the proposal to suspend mark-to-market pricing would allow these firms to value such assets using some other method -- generally speaking, a test for impairment, which would be based on models created by the companies themselves.

But "company-derived models" are the same nonsense that helped convince banks like Wachovia (NYSE:WB) that they could buy billions of dollars worth of garbage home loans and keep them at full value on their balance sheets as foreclosures rose, especially among the very type of loans they held by the billions. AIG (NYSE:AIG) didn't implode because of mark-to-market accounting, nor did Fannie Mae (NYSE:FNM), Freddie Mac (NYSE:FRE), Merrill Lynch (NYSE:MER), or any other financial company that possesses toxic assets on its balance sheet. The problem is, as the name suggests, that these securities must be valued at the price they could fetch on the open market. Even if the holder intends to keep these securities, it must value them at market. At a time of market turmoil such as we exist in today, that leads to these values being marked down. Way down.

That matters because banks have to maintain a certain level of capital adequacy, and marked-down securities lower their statutory capital levels, leading to the need for them to raise funds, which is expensive, or in severe cases, rendering them insolvent, which is, er, expensiver. In the past few months, we've had plenty of the severe cases. In all likelihood, there will be more.

Bad medicine
But suspending fair value accounting because the answer is inconvenient is akin to firing the weatherman because it's raining. Fair value accounting didn't cause the problems in the financial system. Rather, it pointed them out and highlighted the impact of a decade's worth of poor risk control. Fair value exposed the problem; suspending it to allow banks to use alternate methods has the effect of reducing the amount of useful information for investors by obscuring the value of large portions of banks' balance sheets.

Sure, it might feel better, and giving banks the ability to use models rather than fair value might keep a few out of insolvency. But there's a problem. Investing isn't Calvinball. An environment where the rules are changed in order to consistently make things look as positive as possible does not instill confidence. FASB is an independent body, prone to errors, certainly. I doubt, for example, that when FASB promulgated fair value accounting, that the risk of a credit market freeze was a central consideration. But political interference into FASB's role as standard setter is bad policy.

A better solution would be to attack the problem of capital adequacy at banks on the banking regulatory side. It is possible for banking regulators to relax their capital adequacy requirements for banks that have assets they intend to hold to maturity, so that they're not pushed into technical insolvency by virtue of the trading prices of their assets. Regulators could make some determination about whether to use straight fair value accounting or alternate standards to determine the appropriate mark for a bank's asset level. I doubt that anyone is saying that the only valuation level for bank assets is fair value -- in fact, alternative standards already exist.

But let's not kid ourselves that reducing the usefulness of the information for investors is somehow the panacea to making the credit crisis unwind itself. That makes as much sense as rounding pi.