Understanding The Mark-To-Market Accounting Changes
Mark-to-market accounting practices have been blamed for much of the financial disaster of 2008 as banks and other lending institutions found home values plunging below mortgage values.
What is mark-to-market accounting, and how has it affected the recession?
Originally, the Securities and Exchange Commission (SEC) instituted the mark-to-market accounting practices to make sure loans were properly valued. The premise of this practice was that a mortgage should not exceed market value of a property, since foreclosures of homes that were under water in value would leave banks high and dry, without assets to back up loans gone bad.
However, the revaluing of loans was hurting banks as the housing bubble burst, home prices plummeted, homeowners foreclosed and banks found themselves holding toxic assets with no place to dump them.
How has mark to market accounting changed?
The SEC examined the situation and decided to ease the mark-to-market standards so that lenders would be able to take fewer losses on mortgage-backed investment securities. While this resulted in a surge in confidence on the stock market, many are skeptical of this move since it now means banks have yet one more way to hide weaknesses from their investors.
How might these changes affect the market?
With confidence in the financial sector already shaky, many question if the ease in mark-to-market regulation is truly a good decision. Critics view this move as a sleight-of-hand trick, not a significant means of bettering the situation.
The whole purpose of the original mark-to-market regulation was to ensure that assets were valued at the real price for which those assets could be sold on the market. The new regulations allow lenders to portray assets at prices more advantageous to them, not prices that reflect the actual value of the asset. Some of the motivation behind the easing of this regulation is the possible toxic asset purchase plan discussed by the White House, wherein the government would relieve the banks of toxic assets by buying up bad debt at agreed-upon prices. However, the long-term impact of mark to market accounting remains to be seen.
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