You Got to Be Kidding Me!

SEC Decides to Study Mark-to-Market Accounting

Posted in Economics by Stacy McMahon on October 9, 2008

Money quote:

the group believes “it is worthwhile to study the real-world impact of accounting standards, in particular to consider potential improvements in light of recent market events.”

Yeah, I’m going to say we know what the effect is now. For the uninitiated, mark-to-market is also known as ‘fair value accounting’ and the basic idea is that if you hold a financial asset that’s based on a physical object (like a mortgage, based on a house) then the value of the asset has to be based on the value of the object, if you were to sell that object today.

So if, say, you have a bunch of banks that collectively hold a trillion dollars worth of mortgages (many bad, most good) and then the housing bubble pops, all of a sudden their balance sheets start dropping right along with it — in spite of the fact that they’re still owed what the number on the original mortgage says. That doesn’t make sense because a mortgage that’s being paid on time every month is worth what the contract says it’s worth. Only defaulted mortgages are worth the market price of the house. To put it another way, should a mortgage for $90k from ten years ago be valued at $300k today just because the house has appreciated?

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