SEC's Recent Clarification May Help

Matt Lewis
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Posted: Oct 01, 2008 10:36 AM
If you've been reading this blog recently, you know I have been advocating we suspend mark-to-market accounting rules.  This topic is getting some good attention this morning in today's WaPost:
"Some economists are attributing much of the current financial crisis to something as mundane-seeming as accounting.

... An odd-sounding accounting phrase at the heart of this is something called "mark-to-market" accounting. Many think that if this requirement were ended, the crises could be eased.

... Simply put, mark-to-market accounting requires companies to set the value for the assets they own at the price they could fetch on the open market right now. The prices must be "marked to market;" hence the phrase.

What does that have to do with the current crisis? The root problem now is that financial institutions have been caught holding value-less, or "toxic," assets on their books, such as the mortgage-backed securities based on sub-prime mortgages that have defaulted.

The government believes that those assets will be worth something soon -- that's why they want to buy them in the $700 billion Wall Street rescue plan. But under mark-to-market rules currently required, they are worth almost nothing, threatening those who hold them with insolvency."