Kinabalu

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

Getting rid of mark-to-market doesn't get you to "real value", but it does get you to a real number. Accountants for years raved about the benefits of using the underlying cost basis for all accounting data. But we've gotten far away from that.

Using mark-to-market for loans leads readers of financial statements to thinking they are looking at the "real value" of those loans when nothing could be further from the truth. There is no market right now for some of these loan products. But companies that have no intention of ever selling a loan are expected to come up with a market value for it.

Can anyone deny that banks have been subjected to bank runs precipitated by those adverse values? WMs option ARMS loans didn't cause its demise. The FDIC takeover was attributed to a deposit run. That deposit run was caused by a flood of bad publicity, and frankly, made up numbers, about loan portfolio values.

For you mark-to-market adherents, why don't we mark all property to market? I was a financial executive in the airline industry for many years. I once sold 10 airplanes that our company had used extensively for almost 3 times what we had originally paid for them 15 years before. We recorded a big gain. Why didn't that company have to mark those assets to market long before that sale?There was a much more well-known market for those assets then there is for mortgage loans today.