Wednesday, April 1, 2009

On Mark-to-Market

I've actually changed my mind somewhat on mark-to-market (MTM) accounting during the financial crisis. At first I was strongly against relaxing MTM—the banks' complaints about MTM sounded way too much like the bogus complaints I had grown accustomed to hearing from banks over the past 15 years. But I spent a good deal of time either on or right off a few trading floors in the manic weeks after Lehman's failure, and it's safe to say that the intrinsic value of securities was the furthest thing from most traders' minds. (Liquidity and getting net flat to the market were the only things traders seemed to care about.) To the extent that banks are still marking assets at prices set in the immediate aftermath of Lehman's failure, MTM accounting is a legitimate problem. Even in normal times, though, MTM accounting has never lived up to its billing. It's the most accurate valuation method we have, but that doesn't make it accurate. Ultimately, I share Kevin Drum's general ambivalence toward MTM accounting. It's just hard to get worked up about moving from one inaccurate and unreliable valuation method to a slightly less accurate and slightly less reliable valuation method.

5 comments:

Matt said...

Don't forget that MTM is pro-cyclical -- during a bust (as we have recently seem) MTM wreaks havoc on the banks' balance sheets -- but during the boom of the past decade it did the opposite, and led to way more capital being available to banks to make more risky loans, etc.

Of course banks oppose it now, but they were happy to have it when it worked in their favor. Smart regulators would have realized this.

JCH said...

The rule was poorly schemed for a market panic, and greatly exacerbated the panic and did incredible damage to individual investors and the overall economy. Millions of unemployed people are the direct victims of an inadequately designed rule in a panic situation.

The sad thing, these exact people think they are being victimized by fixing the rule.

The media is incompetent.

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