The Wall Street Journal reports (subscription required) on the lengths financial institutions went to to get mark-to-market accounting rules tossed out in April, paving the way for them to value illiquid securities at unrealistically high prices -- padding their bottom lines, and potentially adding millions in value to the options held by company insiders.

According to the Journal, "Earlier this year, financial-services organizations put their lobbyists on the case. Thirty-one financial firms and trade groups formed a coalition and spent $27.6 million in the first quarter lobbying Washington about the rule and other issues, according to a Wall Street Journal analysis of public filings. They also directed campaign contributions totaling $286,000 to legislators on a key committee, many of whom pushed for the rule change, the filings indicate."

There has been discussion of the possibility of suspension of the "Mark-to-Market" accounting rule. This has contributed to the current euphoria surrounding financial stocks. The logic is that this would stop the death spiral in the capital base of many of the banks and other financial companies, an action that is at the root cause of our current financial crisis.

A suspension of "Mark-to-Market" accounting would definitely give breathing room to banks. However, there are other alternatives, such as suspending financial regulatory requirements, which could have the same effect.

Mark to market means that financial assets are marked up or down based on the their price on a given date. For example, brokerage houses routinely do this when they issue your monthly statements. Let's say you buy 100 shares of a $10.00 stock and it drops to $5.00. Your brokerage statement will show your net asset value on this security as $500.00.

Now we come to banks. And here is the tricky part. There is an SEC rule that says that banks must use the mark-to-market procedure to price their assets. There is also a clause that says that they SEC can suspend the rule if it so chooses. This process of mark to market is now creating a major dilemma for most banks. As an example: the Federal Home Loan Bank of Atlanta had three securities showing an $87.3 million loss and had to take that write down. This is a toxic asset that nobody wants. The few investors who would purchase it are throwing in "fire sale" bids in the hope of buying it "on the cheap." The prices of these assets are so wild that there is often a 2000 to 3000 basis point between bid and ask.

The bottom line is that banks are reluctant to sell the assets for virtually nothing and are leaving them on their books. This creates an extremely dangerous situation for two reasons: 1.) taking the loss at mark to market wipes a large chunk of bank equity and hence their lending power, and 2.) there is no way to determine the true value of the bank's stock price.

The SEC is meeting in early January to review this matter and it will be interesting to see what they come up with.