By Paul Weiser
Strange, that ordinary people must learn obscure accounting standards like "mark to market." Yet in the Great Depression all too many had to master capital reserves and double indemnity... so let's consider this pernicious standard.
"Mark to market" is one theory of how a company should value assets on its balance sheet. In essence, it asserts that the correct value is what the asset (such as a mortgage) would bring if the company tried to sell it. There are other rules for other assets (like depreciation rules for equipment) but "mark to market" concerns financial instruments like debt-backed securities.
"Mark to market" arose from two sources: the savings and loan debacle (when companies fraudulently overstated asset values) and the ability - with modern technology - to assign market values instead of accepting face or calculated present value. Trouble with "mark to market" emerges from these roots.
"Mark to market" assumes that an accurate, instantaneous market value exists independent of current owners' and debtors' intentions. If both lender and borrower intend to honor a mortgage no one else wants to buy, its "mark to market" value of zero is nonsense... brought on by a presumption of guilt from the savings and loan crash (and shouldn't the debtor evaluate the debt as zero liability, as if he intends to dishonor it, since there's no market?) These presumptions of guilt are mostly false, hence inaccurate.
Consequently "mark to market" - intended to reveal fraud - instead conceals it by discounting mortgage-backed securities as if each of the included mortgages was bad (because the security as a whole is unwanted). Ironically, this gives deadbeat borrowers and shady lenders who contrived the few bad loans within each security a smokescreen under which to escape. "Mark to market" rules must be eliminated as inappropriate, to flush out the guilty.
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