Mark to market accouting rules

There is no doubt that mark to market accounting rules have contributed to the current “banking crisis.”

In simplest terms mark to market accounting rules cause the banks to have to adjust their assets once per quarter to the fair market value.

With foreclosures on the rise and real estate values decreasing nationwide this has forced the holders of these mortgages to “write-down” their assets.  When the asset is “written-down” the asset account is credited (Which lowers its value) and an expense account is debited.  This means the company will have to acknowledge the loss in its current profit and loss statement.

Due to the recent “housing crisis” the Securities and Exchange Commission has issued a statement clarifying some of the Fair Value Accounting rules.

One of the items that has made the current crisis worse is the fact that no one is currently purchasing “risky” mortgage assets due to the “credit crisis.”  Each company is responsible for writing their assets down to fair market value each quarter.  This is difficult in many circumstances since the mortgage holders have bundled these “risky assets” into large and complicated bundles involving complicated derivatives, mortgages of many types and terms, mortgages in differing geographic locations, etc. 

Merrill Lynch recently sold a package of “risky mortgage assets” for 22 cents on the dollar.  Rival Citigroup currently has their “risky mortgage assets” listed on their books for 53 cents on the dollar.   

With this “clarification” the SEC is basically allowing those holding assets that cannot be easily sold (Currently this includes “risky mortgage assets”) to value the assets at other then the “fire sale” price.  Their argument is that the “fire sale” price is not indicative of the actual fair value of the assets.

Mike Sylvester, CPA/ABV “accredited in business valuation”


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