The leaders of the U.S. banking industry have lately been blaming mark-to-market rules for much of the current global financial crisis. They argue that the mortgage-backed assets on their balance sheets were actually far more valuable than investors realized. But when foreclosures spiked and house prices dropped, the market went into an irrational panic. When the banks were forced to mark the values of those mortgages to the market, they were hammered by massive write-offs that threatened their solvency, and that triggered a wider crisis. According to the bankers, if they could have just ignored the plunging market, and held the mortgages to maturity, then the catastrophe would have been averted. In other words, mark-to-market requires too much honesty, and transparency. A little fudging might’ve helped save a few million jobs.
The holes in that logic are obvious, and thankfully the Securities and Exchange Commission isn’t biting. The SEC recently completed a study that confirmed what most observers already believed: mark-to-market isn’t perfect, but it’s the best we’ve got.
Still, for the average saver, the whole debate ought to be sobering. We’d like to believe that accounting is a cold science of debits and credits, based on rock-solid numbers and incontrovertible calculations. The reality is it is rife with assumptions, estimates, and dependent on the volatile mood swings of speculators. At the very least, it’s a strong argument for getting out of stocks and into government bonds as you near retirement.
And you thought porn was dirty business.
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