Mark-to-Market explained

Many have asked what the mark-to-market rule is.  The best explanation I found is this Forbes article by Brian Wesbury and Bob Stein:

Imagine if you had a $200,000 mortgage on a $300,000 house that you planned on living in for 20 years. But a neighbor, because of very special circumstances, had to sell his house for $150,000. Then, imagine if your banker said you had to mark to this "new market" and give the bank $80,000 in cash immediately (so you would have 20% down) or lose your home.

Isn't that ridiculous?  This single rule is forcing banks, on a regular basis to lower the value of mortgage related assets on their books.  Because, by law, banks have to have a to keep a fixed ratio of assets, deposits and loans, they must stop lending until they add enough capital offset the markdown. 

Banks stopped lending - that's the credit crunch.

All because the "toxic paper" the government injected into the system, since the 90s, had to be marked down at fire-sale prices.

According to the Washington Post, this "accounting standard, has been cited as a contributing factor in the collapses of American International Group, Freddie Mac and Lehman Brothers".  The Post continues, "each quarter, companies must affix a price tag to those securities and report it in their financial statements, even if they do not plan to unload them right away"

So, today - the last day of the fiscal quarter - would be a perfect day to relax the rule and let banks price these complex assets closer to their "book value" rather than a "fire-sale" price.

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