Mark-to-Market Myths

If I read one more mark-to-market screed, I’m going to spit. The gist: An accounting change called FASB 157 pushed companies to mark their balance sheet items to market, and that’s generally a good thing. It means that we have some sense of what toxic paper, real estate, collectibles, etc., on companies’ balance sheets are worth, as opposed to what companies say they are worth.

Trouble is, that only works when there is a market. And in the case of much of the wacky paper causing all the current problems among financial services companies, there was a market, and now there isn’t. It is not, as some are alleging, that people bought stuff that never traded, and are now crying at the idea of pricing it. Instead, it is that these things used to trade, and now they don’t, even if they will likely trade again in future. Forcing people to price to a market than once existed, now doesn’t, and likely will again, is dumb and pig-headed.

Further, we have a negative feedback loop making things worse. Marking newly illiquid assets to a non-existent market makes companies less viable, which causes default swaps to go swooping higher, and that in turn can lead to downgrades by rating agencies. Following the bouncing ball, that can lead to companies failing, which causes less liquidity and lower prices, and so on and so on. You get the picture. It’s dumb and artificial.

Let’s not get rid of mark-to-market — that would be stupid. But we can fix it to handle the real world better. How about, off the top of my head, making marked pricing smoothed over 2-3 quarters in temporarily locked markets? I’m open to other ideas, but I’m highly wary about over-orthodox applications of rules in an attempt to live up to some sort of inappropriate standard.


Originally published at Infectious Greed on Oct. 1, 2008 and reproduced here with the author’s permission.

One Response to "Mark-to-Market Myths"

  1. BrentP   October 2, 2008 at 12:19 pm

    Very well stated. I just wonder how many of the folks who have and will be voting for this $700B package understand Mark-to-Market, and the effect it is having in the current market.