Banks blame mark-to-market rule for write-downs
Banks and lawmakers are pushing the SEC to relax standards placed on banks for mark-to-market accounting, which the banks say exaggerated the effects of the credit crunch.
As the name suggests, mark-to-market accounting is concerned with market value, meaning that the value of an asset on a firm’s books should be linked to its current market price NOT the price paid for it.
Makes sense to me. If I wanted to sell my Honda Civic today, I wouldn’t place an ad in the paper with the 1996 sticker price. No one would buy it because its value is much less now. On the other hand, if I wanted to sell my oceanfront property in Miami (I’m obviously dreaming right now) you wouldn’t see a listing with the 1996 purchase price. People would beat down my door to take advantage of the huge discount!
Unfortunately, things are much more complicated in financial markets. Aren’t you tired of hearing that? Anyway, the problems come from the difficulty of asset valuation and the constant flow of information. These problems are exaggerated particularly when the assets in question are tricky (or “innovative” as Wall Street refers to them), backed by shaky collateral or the subject of rumors or misinformation.
Bottom line: Markets are inefficient, but no accounting rule will save banks from the consequences of poor decision making.
Tags: bailout, credit crunch, mark-to-market, miami, secRelated Stories
POSTED IN: Corporate, Economy, Federal Reserve, Investment, Market, News
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