Mark to market

Here is a scenario – I go to a bank to get a loan and the bank asks, quite reasonably, how much I am worth. I tell them I am worth $1 millon, because I think my home is worth $1 millon. My home, of course, wouldn’t sell for more than, say, $300,000 today, but I think it is WORTH $1 million, and I think if I hold on to it for enough years perhaps I’ll get $1 millon for it. If you were the bank, would you buy that? I don’t think so.

Now let’s talk about the banks. They have a lot of questionable mortgages and credit default swaps and derivatives and the like on their books, and the Federal Government accounting rules require that they value them at the current market price – what they could sell them for right now. That’s called “mark to market”. Of course, they don’t want to do that because that would reveal that some banks are in fact insolvent.

So of course the banks are working their Congressional representatives to overturn the requirement to value their assets at what they are worth in today’s market. And being banks, with money and influence, they have gotten a bunch of House members to buy this argument, and hope eventually to have Congress overrule the accounting standards and let them value their risky assets at some inflated value so that they don’t look insolvent even if they are.

So, in the midst of a crisis originally created by unrealistically inflated values, Congress is thinking about legislating accounting rules precisely so banks can report unrealistically inflated assets, and hide from the public their real financial state.

Isn’t democracy wonderful?