James Kar

Nixing 'Mark to Market' Won't Solve the Problem

A lof the investors blame the current crisis on the accounting standard board. The accounting rules require companies to write down assets to market value, known as "mark-to-market". Since there is no market for the mortgage back securities, the banks have to write down to zero. But now the accounting board allows the companies to use their own judgement when assets have no market. When an asset is bad, it is bad and should be written off. So, by changing the accounting rule, companies suddenly can have a good healthy balance sheet because the management has more flexibility in terms of how to value the non-marketable assets. Of course, a mortgage should be worth something if the borrower is still making payment even thought there is no market. The banks can go back to the good old days of banking operation - own the mortgage they created. Then, the banks can value the mortgage based on the future cash flows generated from the mortgage - mark-to-intrinsic value.

My suggestion is this: The banks should separate the mortgages they own into 3 groups and value them separately. (1) mortgages they want to hold until maturities, (2) mortgages they know are bad and should be written off, and (3) questionable mortgages that they want to sell. Then, we create an exchange to trade such mortgages. The global investors are smart enough to value the questionable mortgages in an open exchange condition. Now, the banks can either sell the mortgages or market them to the market.