You mean our accounting rules require companies holding worthless assets to disclose to their shareholders and potential buyers that the assets are worthless? Shocking!

More seriously, I don't think we have mark to market for illiquid assets such as buildings. To the extent that we think that mortgage backed securities have no value now due to illiquidity but will have value in the long run as the housing market improves, then suspending mark to market for that class of assets might make sense to reflect the long term value.

I think mark-to-market is a great idea, unless the values are too low, in which case we should figure out some other way to prepare accurate financial statements ;-)
By the way, this really isn’t a tax issue; it’s a transparency, disclosure, and mandatory capital issue.

Ahhh, you've hit on the problem. It's those darned accountants who make profits disappear!

If you ask ANY person in bank management if they would like to see the end of mark-to-market, EVERY SINGLE ONE of them will say yes.

Why? Because without it, you can make up any number you want for your earnings and hit that number just by claiming that you hold securities of a certain value.

This is how bankers earn 7-figure bonuses and steal the bank's capital from the inside! It's been the biggest bank heist in history, and the only people who have stopped it have been the accountants.

So naturally, they must all DIE!

Even the Financial Accounting Standards Board’s couldn't figure out how to deal with the mark-to-market accounting shortly after the Enron debacle. Even the Arthur Andersen accounting firm had problems with it which led to its failure too. Enron filed for bankruptcy 2001. The Financial Accounting Standards Board’s has had 7 years and they did nothing. nomedals.blogspot.com

I know mark-to-market was the response to accounting hanky panky at Enron, WorldCom, et al.

Enron actually made money abusing mark-to-market. They would sign a 20-year deal to supply a customer with gas, estimate their probable profit on the contract, and book it right away.

The argument against mark-to-market is pretty weak, since it basically amounts to saying that if there is a problem with a company's assets, the prudent thing to do is state that there is no such problem. It's theoretically possible for a company to have periods in which its mark-to-market assets are lower than liabilities -- as long as it isn't required to make good on those liabilities right away! If a bank is promising that depositors can withdraw at any time, but is also technically insolvent, it's better for them to know this.

To clarify, there is mark-to-market for financial accounting purposes (GAAP), and there is MTM for tax purposes (IRC section 475). For now, I'll comment on the former alone. MTM accounting is a deeply flawed concept because it does not distinguish between true declines in intrinsic asset values, and declines in "value" caused by short term illiquidity in the pertinent marketplace, or, for that matter, any number of other reasons why an asset's "value" may fluctuate on a transitory basis while not deviating materially from the norm reflected by history.

"History" includes the oft maligned historical cost method of valuing assets for GAAP purposes. While historical cost accounting had its imperfections, it at least was rooted in a "cost" fixed by "history" -- namely, an arm's length transaction in the marketplace whereby the asset owner bought the asset at an observable negotiated price.

Lot of folks price and buy assets for the long term. The probability of short term market imperfections (e.g., illiquidity) gets factored into the asset price and, under the old GAAP regime, an asset's historical cost.

It made more sense, as in the good old GAAP days, for companies to disclose MTM adjustments to asset values in the footnotes to their financial statements, rather than flowing such adjustments in an unfiltered manner to bottom line net income.

Usha,

I posted on this on CoOp earlier, at this link:

http://www.concurringopinions.com/archives/2008/09/accountings_rol_1.html

Let's see what the accountants themselves think of this - from yesterday's Dow Jones Newswires:

Accounting Firms Oppose Rescinding Mark-To-Market
September 30, 2008 14:08 ET (18:08 GMT)

By Judith Burns
Of DOW JONES NEWSWIRES

WASHINGTON (Dow Jones)--U.S. accounting firms, which had been silent on the $700 billion financial-rescue package rejected by the U.S. House of Representatives on Monday, are opposing congressional efforts to scrap mark-to-market accounting rules.

Accounting firms hadn't weighed in on the rescue plan, but are gearing up to lobby against an alternative that would rescind mark-to-market accounting rules.

Congress is mulling the idea as regulators from the Securities and Exchange Commission are meeting with the Connecticut-based Financial Accounting Standards Board to discuss issuing additional guidance on using mark-to-market accounting, according to individuals familiar with the matter.

An SEC spokesman wasn't immediately available to comment.

Some House members advocate scrapping mark-to-market accounting altogether as a way to help lenders holding mortgage loans and securities whose value have fallen sharply. Consumer groups have balked at the idea, and accounting firms are about to jump in as well, fearing such a change could deceive investors about the value of troubled loans and mortgage-backed assets.

"It's just bad for investors," said Beth Brooke, global vice chair at Ernst & Young LLP, in Washington, D.C. "Suspending mark-to-market accounting, in essence suspends reality."

The Center for Audit Quality, a Washington, D.C. non-profit funded by accounting firms, is writing lawmakers to warn them against waiving mark-to-market accounting rules.

Big Four accounting firms also plan to join in the lobbying effort, calculating that it is no longer safe to stay neutral.

Accountants won't be going it alone, as consumer groups don't like the idea of rescinding mark-to-market accounting.

"It's absolute idiocy," said Barbara Roper, director of investor protection for the Consumer Federation of America. "Allowing companies to lie to investors and lie to themselves is not the solution to the problem, it is the problem."

Roper said lawmakers need to understand "that the alternative to mark-to-market accounting is mark-to-myth" and could give banks and other financial firms the freedom to value assets at inflated amounts.

Suspending mark-to-market accounting wouldn't be a shareholder-friendly move, accounting experts say.

"It would be shareholder-hostile, for crying out loud," said Jack Ciesielski, president of R.G. Associates, Inc., a Baltimore investment firm that publishes "The Analyst's Accounting Observer."

U.S. accounting rules are set by the FASB, which answers to the SEC. Bankers say mark-to-market accounting rules have contributed to current financial problems because lenders may be required to value distressed assets at fire-sale prices. Current rules require firms to categorize assets in three levels, depending on the amount of market information available, and to provide disclosure when assets are moved from one category to another.

Mark-to-market accounting isn't new and companies have always been required to mark down the value of impaired assets, Ciesielski noted. He said lawmakers who seek to suspend the requirement would be siding with banks and their trade group at the expense of investors, and "may be sowing the seeds for another round of financial reporting devastation down the road."

The mark-to-market idea gained currency after the U.S. savings-and-loan failures of the 1980s, when the federal government took over troubled real estate assets from failed thrifts. Savings and loans had used an accounting approach that masked problem loans and "that just resulted in kicking the problem down the road," said Brian Borders, a Washington, D.C. lawyer and former congressional staffer who is familiar with accounting issues.

"It's one of the reasons that mark-to-market accounting became more fashionable," said Borders. He said the idea is a good one and that in orderly, liquid markets, "it makes pretty good sense."

Repealing mark-to-market accounting could backfire by keeping investors and lenders wary, opponents of the idea also warn.

"If people don't trust the valuations, they're not going to come off the sidelines," said Roper.

Rather than rewrite accounting rules, Roper said she would rather see lawmakers "go back to the drawing board and write a Democratic bill," that would provide more relief for homeowners facing foreclosure.

The issue is most accountants who have been rendering values on real estate are not licensed to determine Fair Value or Market Value. Professionals licensed to determine Market Value and/or Fair value are required to follow the minimum industry standards for valuing property - a document called USPAP. When you think of Enron dont forget about Arthur Anderson. Enron couldnt have done anything without them. In defense of some accounting firms, they do hir real estate broker's to rendere a Broker Opinion of Price (BOP). However, many brokers are violating their own licenses by rendering value without employing the minimum industry standards for performing the service.

Mark to Market might work in theory, but not when the process is rendered by unqualified (and often unlicensed) persons performing the valuation.