Mark To Market Accounting

[The Old Downtown Guy]

I heard a discusion on NPR this morning than included a couple of comments about "Mark To Market Accounting". My understanding is that method allows a balance sheet to reflect the current market value of an asset rather than its cost less depreciation. I never thought much about that way of valuing an asset because it is MOL like buying stocks on margin, if you see what I'm saying . . . market price volitility works to finance more buying, but if the market turns down, it's your ass. But apparently a lot of the "toxic assets" on balance sheets are valued this way, so a lot of the "loss" isn't cash loses . . . just paper profit loses, but since the bank may have borrowed money against that paper profit, when the market price goes down, they get into the same shape as a home owner whose house is worth less in the market than the mortgage against it even though the payments are still being made on time.

I may be totally off base and not understanding this, but it seems to me that it's MOL how I described it.

Michael Smith

Pray For World Peace

[gmwise]

I think this shoud have been done 1st.
then the bailouts would have been cheaper.

[Heyuri]

Its really a vicious cycle, many of these 'toxic assets' are still worth quite a bit. I mean its not like 95% of the country is defaulting on their loans, its maybe 10%... So, even exaggerating the losses we could possible see a 20% loss in the value of these assets. Don't get me wrong, this isn't good, but it certainly shouldn't drive a company into the ground. What happens is, the Mark to Market Accounting forces the bank to list the value of these loans at whatever they will sell for. Since nobody will buy them, they are basically worthless (10 cents on the dollar is some figures I have read).

Since banks are a regulated industry, they are required to have a certain amount of assets in order to pay back the deposits. When the bulk of their business becomes worthless on paper because of an accounting regulation. It turns a painful loss in profits to a possible meltdown that will cause a liquidation of the company. All of this not because the loans they made were that bad, but because nobody is willing to buy the loans (it doesn't matter if they aren't trying to sell them)

Most people could just 'hold on for the ride' but banks have requirements that you or I don't. Since their entire business is based around borrowing money from their depositors and investing it. Everything they do is like buying on margin, they don't have money of their own, they borrow everything.