Mark to Market

No single policy or event ever destroyed as much wealth so quickly as the mark-to-market accounting rules that depleted capital and destroyed earnings.

The infamous mark-to-market rules that were activated in the fall of 2007 (coincidentally as the market topped) are being relaxed to give banks and insurance companies leeway to use common sense and cash flow estimates to value mortgages and other loans, not merely a price set months before by a distressed seller in an illiquid market. Now banks are allowed to value assets as they would in an “orderly” market.

When a House committee held hearings March 5 on the impact of mark to market, members were aghast by the needless chaos and wealth destruction the rules were creating. Finally, politicians have gotten something right. The Financial Accounting Standards Board (FASB) heard them loud and clear. On March 9 the FASB said they would soon have changes to announce. As investors knew any change could only be positive for banks, stocks began to rally, and rally.

On April 2 the FASB released their new rules for valuing some assets. Banks and insurance companies have a lot more discretion now to be realistic, not reactionary. That will help earnings and boost capital, effective April 1. Now that mark-to-market rules have been relaxed, banks can spread losses over several years as they occur, not take them immediately in anticipation of losses that may or may not appear. This is progress.