mathgeek

Mark to Market: Time of Death 8:45AM, April 2, 2009

Here is the question I have for all of the people who think mark-to-firesale is a great idea:

Who would ever be willing to intermediate between liquid assets (deposits) and illiquid assets? What is basically being suggested is that any entity that wants to hold illiquid assets has to hold enough equity to withstand the lowest possible market value over the entire lifetime of that asset... which means the worst case NPV plus an undefinable and possibly infinite liquidity premium. What exactly is the benefit of a rule like this, if in fact the objective is to invest in illiquid assets and hold them to term?

Hedge funds and other asset managers are the worst forms of hypocrites about this issue (in large part because they can and do exploit illiquidity to make profitable short bets) How about we make a deal. I'll agree that everything should always be marked to market, if hedge funds, private equity funds, and everyone else agrees to post 100% collateral for their loans, in the form of US Treasuries.

The idea that mark-to-market provides a form of transparency is also disingenuos at best. All it really tells you is that a company is holding asset class X, which in the current environment has an impaired value made up of an unknown amount of actual value loss, plus some unknown liquidity premium. Anyone who thinks this actually helps to understand a balance sheet doesn't know what they are talking about. At the very best... and this is not likely... but at the very best it might give you some clues as to underlying asset classes and structures that are not otherwised disclosed. Its far more likely that it will be distorted by the need to find odball comparable trades in an illiquid market.

The only people who really support mark to market accounting are academic accounting geeks who place highly abstract theoretical concerns over any pragmatic considerations, hedge funds and other traders who have been able to exploit the problems m2m creates to reap huge profits, and idiots who don't know any better.

Which are you?