While many of us have a loose understanding of how the housing and financial markets contributed to our current recession, many of us are unaware of the ways that the accounting method – Mark to Market – contributed to the magnitude of the crisis.
I’ve heard the term ‘Mark to Market’ before, but my understanding was loose at best. It was a blog post written by Pasadena’s local expert, Irina Netchaev, that really broke it down in a way that was simple enough for me to get my head around. Understanding this one facet of the crisis is really eye opening and definitely worth taking 5 minutes to read.
Hi Linsey, thanks for the mention. It is a difficult concept to understand and am greatful that this post helps!
Ms. Netchaev completely misrepresented the mark to market accounting standards. Assets are marked at a value comensurate with like assets that have recently sold. If the asset sold was distressed, another non-distressed asset would not be valued the same as the sold distressed asset. The ONLY assets which are required to be marked to market are those which will be sold prior to their maturity. Assets which will be held to maturity are valued on their original cash flow basis. And there is great leeway on the vauation for illiquid assets such as CDSes, CDOs, and MBS. Mark to market accounting is more likened to the bank asking for an appraisal before lending on a property. The appraiser bases his/her valuation on comps and integrates any distress or differneces in recent sales into their appraisal.
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