Mark-to-Market Accounting is Dangerous to Investors

Mark-to-market financial accounting recurs as a topic from time to time. It hurt banking in the 2008 financial meltdown. I repeat the potential problem because it will no doubt return some day and bore a hole in your investment accounts.

The Financial Accounting Standards Board, or FASB, loves 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 danger.

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 mis-pricing, 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 and @BusinessNewshole at Twitter.)