Question: I keep hearing talk about "mark-to-market" asset valuation. What does mark-to-market really mean? Steve, Las Vegas, NV
Answer: It's fascinating how an obscure accounting rule came out of the shadows during the financial crisis. In essence, it's a rule requiring banks to guesstimate what is the current market value of their assets. The idea is that putting a market price on assets as if they were going to be sold gives management, investors and regulators a better sense of a financial institution's financial strength. It’s also called "fair value" accounting.
For example, under mark-to-market accounting rules, banks had to recognize that the value of their mortgages and mortgage-backed securities had declined with the fall in housing prices.
Critics charged that mark-to-market accounting made banks look far more financially weaker than they were during the financial crisis. The assets weren’t going to be sold (who would want them?) and the rule exaggerated the weakness of banks. Congress loosened the reporting rules.
Here's the thing: The problem of toxic assets remains on bank balance sheets no matter how the assets are labeled.