Yes, contrary to all the socialists’ claptrap that lack of regulation lead to the current financial collapse, it was in fact SEC accounting and capitalization regulations that accelerated the collapse.  The primary culprit is the “fair-value rule,” S.F.A.S 157, a.k.a. Mark-to-Market.  That regulation says that banks must carry assets at their current fair-market value — what they can be sold for today.

Now, let us say that I own a bond, which I intend to hold until maturity, and which I fully expect to be paid.  Previously, one could compute the Present Value of the bond, assuming it to be held to maturity, and assuming some nominal inflation rate.  With the Fair Value rule, the value of that bond is determined by the current state of the market.

The Fair Value Rule is not bad in and of itself — it does give investors a better sense of the book value of the companies of interest.  However, the Fair Value Rule did not stand alone.  Banks are required to keep a certain amount of capitalization.  So, when the market tanked, banks were forced to sell assets to keep up the capital reserves.  Barron’s said it better than I can:

Mark-to-market accounting, which stipulates that assets be carried on balance sheets at their current market price, has been blamed for exacerbating the credit crisis. By requiring writedowns on loans and securities that have declined in price, institutions have to make a corresponding reduction on the other side of the balance sheet, to capital. That only worsens the credit crunch.

“Ending the credit crisis will be highly unlikely without some type of accounting accommodation,” according to Bridgewater Associates, the highly respected institutional money manager. “Because mark-to-market accounting on existing assets threatens bank capital today, it increases solvency concerns today, which raises funding costs and accelerates the need to sell assets today, which depresses the prices of those assets, which threatens capital and raises funding costs.

This rule may be relaxed or removed soon, but it may be too late.  We have again paid the price of unintended consequences of government meddling and ineptitude.  Will we ever learn?