The Mark-to-Market Accounting Rule

Mark-to-market financial accounting recurs as a topic from time to time. It hurt banking in the 2008 financial meltdown.

The Financial Accounting Standards Board, or FASB, again is considering the use of this standard, which pegs values of financial assets to the volatility of the securities markets. Banks hate it because it helps put their earnings and balance sheets in constant flux.

I have always maintained that the rule was one of the main factors in the subprime financial meltdown. Because it was always hard to price volatile securities, some of which had too limited a market for reliable evaluation. And as a result of the mispricing, short sellers were able to wreak havoc on banks even further, to the extent of the collapse we witnessed.

Yet. instead of taking this discrepancy into account early to prevent disaster, mark-to-market financial accounting rules were kept on. After the meltdown, rule adjustments were allowed, A case of closing the barn door after the horses left.

I speak from experience as a former Wall Street senior banking analyst: When the books allow for the sequestering of questionable assets and the analysis is done correctly, you avoid disaster by posting conventional bookkeeping numbers during financial emergencies. It can prevent short-term psychological disasters that fester into long-term catastrophes. ( See the Earl J Weinreb NewsHole® comments.)