John Walter

An Obama Speech to Light Wall Street on Fire

Do away with mark-to-market?

It seems to me that, in the aftermath of Enron, regulators understandably changed the rules. The banking industry (collectively) decided that the rules changes didn't affect their models of collateralization, since the market for these illiquid securities would always move higher.

It reminds me of traffic at times on urban expressways: everyone tailgates at 70 MPH and as long as nothing unforeseen happens no one gets hurt. But the moment there's an unexpected stoppage, the chain-reaction damage is enormous. Your argument reminds me of a driver who might argue "Changes are unnecessary; let each driver judge for himself the proper speed and spacing. It's in his own self-interest to be prudent." The problem is that some drivers will always prove to be reckless or exercise poor judgement, and will cause accidents for others.

Here is another idea: leave mark-to-market in place. For prudent institutions, it provides rules-of-the-road that keeps the industry safer (even as it limits the speed at which one will arrive at his destination). Reckless institutions must pay attention to the rules or pay a heavy price.

New rules require new behavior, something that the financial industry is learning too late, to the detriment of our economy.