The Trashing of Mark-to-Market Accounting

OK. I am going to try to make this easy for those not of the "Green EyeShade" persuasion.

The drum beat on the news is that we must suspend the Mark-to-Market rule! MTM is killing our financial institutions! And so on....

What is MTM? Mark-to-market, or fair value, accounting rules require financial companies to value assets based on what they could fetch in a current market transaction. Seems reasonable? Let's see how Mark-to-Market concepts work in the real world....

Our World - Two ordinary people: Let's assume you want to sell me your car. We could look up the market value of this car in a number of sources and that becomes the basis for our negotiation. And maybe I agree to pay a little more or a little less than the appraised value but if it is an honest transaction where no one is hiding anything, generally the deal is made at or near the market value.

The financial world: Banks have all these bad loans on their books. And nobody wants them. What do you think these loans are worth? A lot less than what the banks lent for sure. But the banks say, "if I have to show these loans on my books based on what I could sell them for, then I will be insolvent!" Too many liabilities and too few assets. I am too big to fail!!!!! And if I fail, you are going to be very, very unhappy. In fact, until you take these bad loans off my books or give me some way to say they are worth more than they are, I am not going to lend any money.

And so my dear readers, the drum beat begins. Everyone will start talking about how Mark-to-Market is killing our economy, destroying lives and ruining our society. Anyone who opposes repealing this rule will be swept aside or personally attacked.

But here is the best part.... only financial institutions will be exempt from Mark-to-Market rules. They will get to decide what their assets are worth not the market.

The rest of us, well, we are at the mercy of "bend over" Bernanke and the Central Banks of so many of your countries. Your house, your car, your investments, your business will be worth what the market says it is worth.

Mark my words.... you are marked to the market.....