The current mark to market rule, while nice in theory, works in normal times. But it has the unintended consequence of making things worse in crisis times. Why should an institution have to write down a security which over time is going to pay back the lion's share or more of its value just because a severely stressed institution was forced to sell that security at a very low price in a time of crisis?
Yes, there needs to be transparency and we as investors need to know what is on the books of the companies that we invest in. But it is somewhat like my bank asking me to mark to market my home and pricing my loan daily based on that new price. If my neighbor loses his job and sells his home at auction, does that mean my home is now worth less two years from now. Maybe an even better analogy, if I am renting that home to a very good tenant, does my neighbor's price impair my income?
Saturday, September 20, 2008
Quote of the Day: Mark to Market
If you don't follow these things, a lot of the present financial crisis comes from a change in accounting rules! Seriously! The FASB changed from a "mark-to-model" approach, where companies could value financial instruments such as mortgage-backed securities using a computer model based on default rates, to "mark-to-market", which is the price you'd get in the open market, based on the last sale of that asset. John Maudlin writes: