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March 13, 2009

Mark-to-Market Debate Moves Forward

Catherine New
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Will suspending mark-to-market save the banks? The debate, which has been raging in the financial press for months, may finally be moving toward a resolution. The House Financial Services Subcommittee met yesterday to discuss the issue, and the head of the Financial Accounting Standards Board (FASB) Robert Herz told the Congressional panel that the agency would issue new guidance on the rule in three weeks.

Mark-to-market currently requires banks to reprice their balance sheet assets each day based on the assets’ open-market value. Banks claim that the rule is forcing them to unfairly mark down the value of their assets, such as their mortgage-backed securities. Supporters of mark-to-market say that it creates more transparency.

While some investors are putting a bullish spin on the news of the possible rule adjustments, Floyd Norris ’83 has a much more skeptical view. In his Friday column in the New York Times, Norris writes, “Sadly, a victory for the bankers would not help them much. Even if it were true that banks would be held in higher regard now if they had not been forced to write down the value of their bad assets — and that is, at best, debatable — changing the rules now would be counterproductive. Would you trust banks more? Would other banks be more inclined to trust banks?”

In an interview earlier this week, Warren Buffett ’51 came out in favor of suspending the mark-to-market accounting for regulatory capital purposes.

Appearing on CNBC’s The Kudlow Report on Wednesday, Senior Vice Dean Chris Mayer offered his thoughts on the issue. “The problem is, ‘What are the write-downs that are still sitting in the system?’ The continued critique of mark-to-market is that the current values are just based on illiquidity and they’re low. But we have not seen the bottom of the economy, so I don’t know how anyone can say the values are too low.”