The Mark-to-Market Rule is Here Again?

The mark-to-market financial accounting rule is rearing its head again. It will hurt the banking picture once more, as it did in the recent past.

The Financial Accounting Standards Board, or FASB, again is considering the use of this standard, which pegs the value of financial assets to the volatility of the securities markets. Banks hate it because it helps put their earnings and balance sheets in constant peril.

I have always maintained that the rule was one of the main factors in the sub-prime financial meltdown. Because it was always hard to price especially volatile securities, some of which had too limited a market for reliable valuation. And as a result of the latter mispricing, short sellers were able to wreak havoc on banks even further, to the extent of the collapse we witnessed.

Yet, instead of taking this discrepancy into account early to prevent disaster, mark-to-market financial accounting rules were kept on. After the meltdown, rule adjustments were allowed. Too late.

I was once a senior banking and insurance analyst. When the books allow for the sequestering of questionable assets and the analysis is done correctly, you do not court disaster by posting conventional bookkeeping numbers during financial emergencies. It can prevent short-term psychological disasters that fester into long-term catastrophes.