MARKING TO MARKET ON THE WAY DOWN.

MARKING TO MARKET ON THE WAY DOWN . Kids, you can read in the newspaper or on Yahoo that “the Financial Accounting Standards Board voted unanimously to let banks exercise more judgment in using mark-to-market accounting that has forced billions of dollars in writedowns and been blamed for worsening the recession.” As this wikipedia article describes, marking to market refers to valuing a financial instrument based on its current fair market price. This works well when there is an organized market. The Chicago Mercantile Exchange marks positions to market twice a day, at 10:00 am and 2:00 pm in order to monitor whether traders have enough reserves against their positions. Toxic assets present an enormous problem if they are marked to market. They are, we now know, almost impossible to sell. How do you know what you are getting? Their prices now are very low, but perhaps if they are held to maturity they may have a lot more value. Marking to market means that a lot of institutions, according to their financial statements, have a lot of worthless assets. There is a lot of controversy (some of it is described here) about what to do about mark to market. I have argued with my brother about my opinion which is: Marking to market of toxic assets caused a lot of mischief on the way up. Any opportunity should be seized to restrict the application of market prices to assets that are not actively traded and cannot be actively traded.