Mark-to-Market: Why it Matters

For several days now, people have been watching the news and hearing experts talk about “mark-to-market.” Specifically, the need to lift or suspend this accounting rule. This well meaning but incredibly destructive rule has caused grave distortions in the market, and the wrath of financial industry write-downs that have spiraled into the credit and U.S. financial system crises that we face today.

Some groups and individuals -- like SBE Council -- have called for the suspension or repeal of mark-to-market. In our view, such a move should provide some financial market calm, and an anchor in which to move to further stability.

U.S. Securities and Exchange Commission (SEC) Chairman Christopher Cox has the authority to suspend this rule right now. No waiting around for congressional action, or for Congress to reconvene on October 2.

Unfortunately, many have observed that he will not make this move as the Chairman has not been one to take bold actions until faced with key deadlines at his doorstep. That is why pro-suspension supporters are pushing Congress to include mark-to-market suspension in the bailout package (the House Republican’s alternative package, for example, includes this provision). If the law requires Cox to suspend mark-to-market, then he will be required to do so.

Suspending the mark-to-market regulatory rule for long-term assets would help stave off the “mania” where firms and banks must evaluate their assets at current market levels rather than their long-term investment value. So, currently solvent banks are being forced to “write down” their assets based on the last fire sale of a highly leveraged bank. In order to stop the contagion, assets need to reflect their true economic value.

As the Competitive Enterprise Institute’s John Berlau writes in a recent blog item, “this accounting issue once considered to be obscure played a prominent role in the House floor debate. Louie Gohmert (R-Texas), Darrell Issa (R-Calif.) and Jeff Fortenberry (R-Neb.) all correctly noted that if Treasury Secretary Hank Paulson and regulators would simply let these securities be valued at the price Paulson wanted the government to pay for them -- instead of the last fire sale price per mark-to-market rules – it would largely do what the bailout intends without putting taxpayers on the line.”

What does Chairman Cox have to lose? Congress is out until Thursday. Suspend mark-to-market. Such an action is much less of a risk than doing absolutely nothing.

Karen Kerrigan, President & CEO