NREI Looks at Mark-to-Market Accounting

Something that's emerged as one of the key provisions in the bailout bill that passed Congress last week is the possible suspension of so-called mark-to-market accounting. Our sister publication NREI takes a look at that in a lengthy story.

A change in accounting practices should improve the effectiveness of the bailout in helping banks regain some liquidity, says Beth Lambert-Saul, director at Archon Group LP, a wholly owned subsidiary of Goldman Sachs in Dallas. “Mark to market is one of the things that was just killing people,” she says. “And every time you write down your investment, it's a self-fulfilling prophesy.”

Yet the alternative — valuing securities to a model or to a standard that doesn't reflect current sales — creates its own problems by skewing values upward. That's why policy makers likely couldn't have avoided the current crisis simply by suspending mark-to-market accounting sooner, according to Dan Smith, managing director of the Dallas-based real estate mortgage capital division of RBC Capital Markets. “The issue would have been that you would have had massive balance sheets that in effect would have been overstated.”

Economists agree that the credit crisis is too complicated to be fixed by merely suspending an accounting rule. FASB 157 is “something that people want to seize on but it's not a central part of the problem,” says economist Jim Smith. “The central part of the problem is way too much leverage in the system, and unwinding that leverage is not going to be pretty,” says Smith, who is Professor of the Practice at the Institute for the Economy and the Future at Western Carolina University.

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