Many banks and industry organizations have blamed this accounting practice for the downward economic spiral, as it forces businesses to assign a low value to assets as they would trade today, even if the company doesn’t intend to sell them.
Critics have also charged that it is impossible to determine fair market value in an illiquid market, such as the one that began to materialize after the risky trading of mortgage backed securities reversed course.
The S.E.C. said it entertained all such concerns and cited several others which, the agency’s paper said, likened the notion of suspending fair value accounting to ” ‘shooting the messenger’ and hiding from capital providers the true economic condition of a financial institution.”
The funny/sad thing is, mark-to-market was originally a gimmick for companies that had lots of long-held appreciated assets that they were tired of keeping on their books at original cost. They wanted to be able to book the increase in value without having to sell the assets. But decreases in value, nah, you wouldn’t want to book those.
And in an honest world, mark-to-model could make perfect sense because, yeah, the market can be irrational and it’s stupid to have to completely revamp your capital plans just because some trading programs somewhere had a temporary snit. But the models we’ve seen (and it’s pretty clear we haven’t seen anywhere near the worst of them) from the most recent crash have just been horribly and stupidly dishonest. “Let’s value our derivatives based on the assumption that the underlying asset never falls in price.” “Let’s treat this risk as half of what we should reasonably know it to be, because it has a rating-agency stamp on it.” “Let’s assume that everyone getting these mortgages is telling the truth, they’re just not very good at finding the pay stubs to back it up.”
So yeah, mark-to-market is a mediocre way of valuing things, it’s just that all the other ways are even worse. And particularly bad in an illiquid market? Well, yeah. Because when the market goes into a panic your creditors don’t want to know if you could pay your debts if only the market wasn’t in a panic. That would be like wanting to know if you could buy that house across the street for cash if only the market wasn’t in a bubble.