Forbes on Mark-to-Market

On Friday, November 21, Steve Forbes appeared on a TV show and was asked what could be done to fix some of the problems infecting the financial industry. He was especially emphatic on one point, stating that the mark-to-market rule instituted by FASB (the Financial Accounting Standards Board) be eliminated.

Mark-to-market, as its name implies, requires that all companies who hold financial instruments on their books adjust them on a quarterly basis to the price which those securities would fetch if sold in the open market. In the current environment, though, there is little if any liquidity for mortgage-backed securities; consequently, their pre-meltdown values have tanked. Even as these investments continue to be held on the balance sheet of a company, the FASB rule requires that they be written down to an if-sold value. This has resulted in huge paper losses and corresponding write-downs against reported quarterly earnings.

As Forbes pointed out, this can be devastating. For example, insurance companies purchase and hold financial assets in their investment portfolios for the long term, often until maturity when they are redeemed at full value. By adjusting the book value of these securities to an estimated if-sold market price on a quarterly basis, insurance companies can end up recording enormous book losses which have not, in fact, been incurred.

In a normal economic environment where quarterly bond market fluctuations are relatively minor, the mark-to-market rule may have made sense. But, in the maelstrom in which the U.S. and international economies seem to be navigating, Forbes stated that FASB should re-evaluate this accounting rule.

Yesterday’s events seem to have diminished that prospect: The Federal Reserve announced that it will buy $500 billion of mortgage-backed securities – the so-called ‘toxic assets’ held by banks and investment firms. No indication was given as to how prices would be set or publicly disclosed.

Thanks for checking in, and enjoy your Thanksgiving. Despite all of the turkeys in Washington, we still have immeasurable blessings for which to be thankful.