Thoughts on mark - to - market accounting

Every "solution" comes with its own set of problems. Fair value accounting or mark-to-market was a solution to some of the problems from the scandals earlier in the decade. Unfortunately, the brainiacs that came up with it never anticipated that an entire class of securities could be percieved as being worthless virtually overnight.

Even if you went back to putting them on the BS at cost, that might alter the scramble for new capital at some institutions but it wouldn't necessarily restart a market for the paper.

Of course, it's fine to consider alternatives with care, but it takes some time. Meanwhile we are in a death spiral. One firm makes a distress sale and another has to mark down their assets. Then they have to raise capital at poor prices. Then Paulson and Bernanke decide whether to help out and which shareholders and bondholders are protected.

This process is not fair. It is not capitalism. It is not a free market. We need a time out.

FASB has a pending amendment to FAS 157 that provides an example of valuation of illiquid securities. The comment period ends tomorrow. They will vote on Friday and it will apply to third-quarter reports. It clarifies the rule.

Oh boy, Barney Frank is scheduling some hearings. There will be a change, but it will not help the financial institutions that have been wiped out in the interim.

But then again, one simply cannot have a mark to market when no market exists. There is no problem marking to market for a stock. Take IBM (IBM) for example. If you want to buy or sell 1 million shares, you can easily go through the process of price discovery by going down to the NYSE (NYX) and asking the crowd and specialist and representatives of upstairs sell-side traders where the market is. There are plenty of players to make a market. For the corporate bond market and asset backed securities markets, the market is a fiction. You have very few dealers who will make a market in these securities. If you are a seller - fahgetaboudit. There is not market for those securities. It is a loose confederation of dealers. Price discovery is weak at best. You are at the mercy of a few people who are the "market."

How logical is it to "value" illiquid, long-term assets on the "market" when none exists? To "value" these securities at fire-sale prices, determined by desperate sellers? Why is their value set by the latest sale, by the idiot of the moment?