Blog 4 Mark to market

Is “Mark to Market” a Cure for the Banking Crises?

In the 20th Century Congress came up with a new accounting method called “Mark to Market”. This rule has been attributed for the current financial crisis we are in by inflating and deflating assets on balance sheets of major financial institutions.
The current recession we are in was led by the housing bubble. This has caused severe trouble on some of the largest banking institution’s balance sheets. Is Mark to Market to blame? First let’s find out what it is. Mark to Market is an accounting method used to record the price or value of a security at its current market value rather than its book value. This means that a mortgage backed security, which is illiquid, can be valued the same as a stock like Microsoft, a liquidity that is traded daily.
In a recent commentary for Forbes, Newt Gingrich (the former Speaker of the House) tells us that the government needs to “suspend mark-to-market”. I agree since this is certainly hurting banks and creating huge losses on paper leading to loss of credit and capital. Suspending it should stall the bank failures. It should also suspend us from having to loan them billions of dollars. He tells us that “while congress and the president are trying to figure out their next move the treasury should intervene”. He is right since what they have done thus far, just throwing billions of dollars at the problem, has not freed up lending. Newt goes on to say that “when these firms try to sell these mortgage backed securities to raise capital, the market values of the assets are driven down further”. I’m torn by this statement. On one hand mark to market is hurting the current values, but in the past 3-4 years it certainly helped them. The other side to this is when the inflated prices were on paper and many people were making a lot of money no one complained. Now that people are losing money they want to get rid of mark to market. It should be suspended right now and see if it helps, it can’t hurt. Then before the economy turns around the government can revise it so next time maybe we won’t have such a severe problem.