Would suspending mark-to-market rule solve the financial crisis?

Is everyone really that clueless. First Mark to Market is only an accounting rule. It is not the cause of the problem. Changing this rule will do nothing to fundamentally correct the problem. This is a good rule that increases transparency and requires banks to report certain assets at fair market value. Yes, the market for mortgage backed securites (MBS) has dropped and the banks are losing their butts because of it. Allowing Banks to shore up their financial by pretending their assets are worth more, will not fool investors into buying these troubled assets. Arguments that the mortgages are worth more than the market will pay is naive. The crisis in the housing and mortgage market is far from over and the market value of these securties reflects this. The old adage is true..."The market knows" Solving the liquidity crisis at banks IS important, in fact a crucial necessity. The banks current capital is suffering from the illiquidity of these MBS as well as the bank's nonperforming loans. Lending money to certain responsible banks (with secruity where possible ) is not a bad part of a comprehensive plan. Helping troubled mortgagers restructure their loans and other improvements to the economy to get payments flowing on the loans is needed. If the loans dont get paid (and many wont) the banks and their shareholders are the ones who rightly will suffer. (sorry shareholders) Where decision makers at the banks are responsible and where reckless incompentent or fraudulent behavior took place, executives should be sued for their lack of stewardship by shareholders. I do not sympathize with ignorant borrowers either, although i do believe that many were decieved. Bailing them out and the banks is totally wrong in principle but since our economy is reliant on credit so much we must assist some of the banks in the short term to prevent a complete crisis. I only hope that some1 with a clue oversees this and doesnt let these cronies rob us of more.. By the way how stupid are the analyst at the credit rating agencies that continued to support the runnup on the value of poorly run banks . Were they just incapable is seeing the real value.. ( the market value) . Its totally ridiculos to change back to historical value and abandon mark to market. If anything we need to have the banks properly value all their assets because apparently the high paid analyst on Wall street cant or at least didn’t and the regular guy investor was relying on them too.

Mark to Market is good. Restructuring loans to lower interest rates sounds like a good idea and it may save many mortgages. Banks should have been negotiating with customers six months to a year ago. Those that do will save their shareholders alot. those taht dont can go down and i vote no to saving banks taht are unwilling to work with those customers where saving a mortgage just makes both moral and business sense.

The Mark-to-Market rule is indeed voodoo economics. The value of an asset is determined by its supply and demand. If demand is high for a certain product, commodity, asset etc., the price is high because there is more demand than supply. Once supply is equal to demand, the market for that product reaches equilibrium and a stable price is reach. Thus, prices and values are a function of supply and demand.
Folks, this is why I believe we are in deep trouble. Even if a bail out occurs, we are facing a depression. How big? this is difficult to ascertain. Our system for nearly the last two decades has been growing (expanding) by the use of credit (debt). This use of credit created a huge aggregate demand. This demand is and was, not effective aggregate demand, but rather what I call ineffective aggregate demand--borrowing with the promise to pay in the future.
What's going on right now is that reality has set in--the rubber has hit the pavement. The problem is not one of liquidity but of credibility (trust). Who wants to do business with an entity that might be insolvent. The house of cards that we have created with this borrowing binge is crumbling by the housing bubble created by lending money to people who were practically barely making ends meet--broke, and by the securitization of debt--debt passed on bundled as securities. Before there was an expectation of solvency; responsible financial people, firms, etc. with decent credit score ratings were expected to pay back. Now that expectation of solvency--of trust--is gone. The financial crisis right now is the direct result of the deleveraging that is occurring in the financial system. Banks are holding on to their cash because they are capitalizing themselves to cope with their staggering debt loads created by the housing bubble, and don't want to lend because they're afraid that they are not going to get their money (investment) back. The total amount of debt out there is staggering--is in the trillions, and this is true for every single entity out there, firms, households, gov't entities etc. etc.
This huge debt is not going to disappear. It has to work its way through our system. Which means that a lot of FIs (financial Institutions) are going to go belly up--creating a chain reaction ( I think is has been created already). This is going to create a huge contraction in aggregate demand, equally creating a huge contraction in aggregate supply. In other words, a depression.
What the feds (Paulson, Bernanke) are doing right now is orchestrating a spread of all of this huge debt among all of us. It started with the bail out of Bear Sterns. Will it work? Will see.. but first our system is going to have to reach a new equilibrium. One set by the expectations of solvency (trust) and by effective aggregate demand.
It's a very complicated problem, and the above is just my humble attempt to put it in its simple form using a Macroeconomic model. I welcome any other insight.

This is terrible. Let the banks lie about values will get into so more serious trouble.

Mark to Market accounting rule is a tempting way to commit accounting fraud. Call Jeff Skilling in jail and ask him where this rabbit trail leads. Enron's crimes led to two years worth of congressional investigations. Sarbanes Oxley legislation prohibited Mark to Market as an accounting method. Any temporary suspension simply delays the inevitable encounter with an accurate balance sheet. The truth will out.

CONSOLODATION, to make a long story short... This is going to be somewhat painful, but I see a much healthier and more transparent banking system, being born, here. Also, while this will be good for banks and customers, it may have a negative effect on banking services, banking supply and IT companies. BTW, I only need one license for that banking software, instead of ten... Thanks!

Hasty decisions are almost always wrong decisions. In reading many of these comments, I am impressed by the critical thinking, the questions posed, and the intelligence of the American people. It seems to me that eliminating the mark to market accounting rule is ridiculous. At this important moment, we ought to flood the senate with emails in support of a slower, more thoughtful course of action, rather than yielding to the wave of frenzied voices claiming to be "in the know" that are currently clogging the airwaves.

Market up, recession is over! Congress cancels all mortgages.
------Ok maybe not, but the market is up 485 points today and all of the sudden there's talk of the fallout from this crisis not being so bad after all. Don't kid yourself, the only reason the market is up today is because there's BS going around that the "savior of the stupid (SOS) bill" is going to pass Thursday. Don't count on it!

The bill to buy $700 billion mortgage backed securities, looks like $350 billion now with more later if needed (like they wont need it later. Come on people!), the FDIC insurance limits moved from $100k to $250k (this should have been done decades ago) and now their adding tax cuts and a "bridge to nowhere" in addition to....
continued at -------www.mortgagebreakdown.com

Yes, but others have been suggesting this for months... many months. See my most recent artice: Wall Street Bailout, Congressional Cover-up, or Sarbanes-Oxley?

Your example is reckless. If you weren't comparing apples to oranges I could have been hooked.

The idea that the $1 is changed to $.50, because one person makes a bad deal is completely inaccurate. First off, the $ never changes. Second, one bad deal, one sale at a lower price does not lower the market.

This is a fundamental issue that cant be cooked away with less transparency, or by removing free market principles. People are smarter then that. Are you the kinda guy that sets his clock 15 minutes early to get somewhere on time?

I say stop the bailout and put the capital gains tax to zero. After that do what T. Boone Pickens is saying to do and get this country energy independent in 3 years! Challenge the American people to step up to the plate and look for ways to conserve energy while we get back our Independance. Create new Jobs in America. Focus on Wind, Solar, Oil Nuclear and Coal and Natural Gas not some bill that is going to cost our kids $700 billion! Fire up GM, Ford and Chrysler and the rest of the Auto companies to start designing better electric cars and trucks! Fire up America to step up to the plate and tell the rest of the world that we are great at what we do, and then do it!

M2M's not the problem, it's the assets that are the problem. Accounting tricks only get you so far, then reality intrudes. BTW, nothing in M2M requires the value of assets to be established based on one anamolous transaction.

According to mark-to-market accounting, you, with your 20 dollar bills, now have a net worth of $10. Even though you are still holding the exact same 20 one dollar bills you held in your hand when you entered the room and even though you did not trade with anyone else in the room, the current public market in the room for $1 bills is 50 cents.
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williamgeorge
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Late to the party. What I'm wondering is where these securities are kept in the books. Because if you are going to lose mark-to-market accounting, then they must not be accounted for as short term assets in any way, shape or form. They should be accounted for as high-risk long term assets.

And while (90+X)% of mortgages backing these securities are not in default (and the (100-(90+X))% of those in default still have some value, since they are backed with real assets) unless you know the state of the specific mortgages backing a specific security, you can't know in advance it's final value -- you just have to trust that the people who created that specific security didn't (intentionally or through incompetence) back it with junk.

And if there were such trust generally, then there would be a market.

My gut feeling is that losing the mark-to-market rule was a very bad idea that may solve this short-term lack of trust (the lack of general trust is greater than than the actual general risk) but that will cause more problems (i.e. the overvaluation of assets on the books of companies) in the long term.

My opinion is that those that want to delay the mark to market rule are the same ones that played in the false values of the Enron era. Some think they are the smartest ones in the room, but realty eventually shows itself. The analogy in the article is not quite right. One does not really hold $20 at all but only the promise that a third party will eventually pay $20. Maybe $10 is not the true value but certainly the value is not $20 when there are many defaults. The cash flow is likely different from the legal form. The SEC new rule allowing creation of a model subject to auditor reviews is a reasonable alternative

Mark-to-market taxation accounting was introduced to make balance sheets more accurately reflect values. It was also supposed to force companies to be more realistic in their public announcements. Without m-2-m you can easily flal into another trap: having completely realistic balance sheet figures.
However, it introduces valuation volatility into markets which are not readily made liquid- real estate beign the obvious example.
If the US could somehow create some kind of real estate exchange whereby investors can buy and sell properties instantly, in the manner of common stock, then mark-to-market may be tractable.
It might well introduce renewed volatility into real estate, but that is another problem.
Marking to market is not intrinsically wrong. But the method must be appled to liquid markets.