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Exactly what is 'mark-to-market'?
Stock market data
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TEXT OF STORY
Kai Ryssdal: All right, now that you know all about the politics, it's time to get back to the economics. We're a business program, after all. The Senate's bill would authorize the SEC to suspend something called 'mark-to-market' accounting. Marketplace's Jeremy Hobson got the assignment to explain: so what?
Jeremy Hobson: Well, for help explaining mark-to-market, I've come to professor of accounting Joshua Ronen at the Stern School of Business at NYU. Professor, what is mark-to-market?
Joshua Ronen: It means that if you hold investments in a particular security, you quantify those securities on your balance sheet at the current market value.
But how do you know what the current value is today?
Ronen: This is where the problem starts because in an illiquid market where there is a credit crunch, if you have a fire sale of securities, it's going to be a very low value, and that itself triggers downgrading by rating agencies and potentially more capital requirements, hence the tendency of these institutions to ultimately become bankrupt.
In other words, Ronen says, if these institutions didn't have to value their assets at the current market price when no one wants to buy them, they might be able to get through the credit crunch relatively unscathed. The argument for mark-to-market is it tells investors exactly what buyers are prepared to pay for a security. Cindy Fornelli, the executive director of the Center for Audit Quality, calls it "fair value" accounting.
Cindy Fornelli: Changing the rules, particularly mid-stream, would send a very bad message to investors that you can know what the current value of securities is, as long as the news isn't bad. And then, if the news is bad, we're going to hide that news from you and not let you know.
The fact is the SEC already has the authority to suspend mark-to-market, but a strong push from Congress could be what it takes to finally overcome opposition within the industry.
In New York, I'm Jeremy Hobson for Marketplace.
It would seem to me that value should be determinded by what somebody is willing to pay for it, be it a share in GM stock, a work of art, or one's stamp collection. If a company's balance sheet suffers using this method (market to market)and leaves it vulnerable to bankruptsy. so be it. Fair is fair. How could any reasonable person be willing to accept a company's worth based on the value of their shares in AIP a few years back.
Why aren't the obvious questions raised by changing mark-to-market made a part of the original piece? Marketplace needs to deliver more substance, it can be done in a light-hearted way, but it needs depth. If you cannot tell me, where I am left to turn on the air? If I am too pressed for time to go researching, what then?
The foregoing comments are right on point, and are emblematic of what is wrong with media reporting in general: shallow treatment of critical subjects rather than in-depth explanation. NPR is the last place left to turn for real substance versus sound bite reporting. Yet more and more it is adopting the cutesy, flashy approach mimicking mainstream media. We don't need silly "players" skits and the like. We need substance.
I'm the equivalent of the bootblack economist, so please explain what are the draw backs to the alternative to 'Mark to Market.'
How will assets will be valued?
I heard a commentator say this means: 'assets are worth what ever a company says they're worth.'
If true.
That's like me saying my house is worth $500K (cause it was once appraised at that) and the government paying $500K, even though I couldn't get $200 for it right now.
Aren't we in the current situation because people were over inflating values? The logic behind this seems incredible. Your assets are worthless on the open market, so people don't trust you, so we're gonna let you say they're worth something now?
Please help.
