For those of you who aren’t familiar with mark to market, the term refers to the present day value of an investment, regardless of how much was originally invested. It was put in place as a part of US GAAP in the early 1990s, and the use has increased steadily over the past decade, primarily in response to investor demand for relevant and timely financial statements that will aid in making better informed decisions (according to Wikipedia J).
A good example of mark-to-market is people’s homes. Let’s say you bought your 2 bedroom apartment in Miami Beach for $300k two years ago. Taking into account the current real estate market, if you were to mark-to-market the current value of the apartment it would probably be closer to $200k.
Companies like GE, Citigroup, Bank of America, Wells Fargo, and many other financial institutions would benefit greatly if mark to market accounting were suspended.
The largest example is probably AIG. Currently, AIG is a $1b company, give or take. The stock is teetering at around 50 cents! Compare that to Bank Hapoalim – Israel’s largest bank – which has a $2.2b market cap – with a tenth of the assets! AIG became insolvent and was subsequently bailed out by the US TARP, due to mark-to-market accounting standards. Without mark-to-market, it would have survived. But would this been a good thing, or a perpetuation of the financial facade?
But more importantly – to save the global economy - the question is would suspending mark-to-market be a good idea or a bad idea to stimulate or save the economic meltdown? Two options:
1) Bad: Suspending mark-to-market accounting could completely destroy the financial system, since banks would be able restore assets to their original value and investors would have a much tougher time understanding the true value of these companies.
2) Good: On the other hand, on paper the banks would look more attractive and the investment dollars would return to these institutions. Subsequently, lending / borrowing would be restored quickly, and perhaps the underlying values would slowly catch up to the paper value.
I am not an economist, so thoughts?