Mark to market could prevent crisis if allowed to work

What happens when there is no market where banks can sell their securites or mortgage paper? If the market stalls, the pricing of assets becomes extremely difficult, but there usually is a market. The issue today is that the banks don't want to sell at market price.

It means these assets have the potential to be toxic because the underlying collateral is valued far less than the paper asset. the banks over extended themselves and made no plans for market downturn. Everything changes for the banks and actually individuals as well when there is no one willing to bid on what you are selling. mbs or individual home.....losing that flexibility of selling in reasonable time to at least cover the cost of the asset or home spells disaster. Our economy is suffering because the fluidity of these markets has disappeared. If some individuals default it is the job of the regulators and banks to make sure they can survive and prevent meltdown. The assets may not be worth zero by most people's opinion but in reality if no one will pay you for your asset, at least enough to cover the debt of that asset, then it is virtually worth $0. Even using a home as an example makes it clear. If you have a home most likely everyone will agree that it is not "worth" zero. However, it becomes toxic as soon as you need to move or sell if there is no market. It might be worth less than zero because it becomes an albatross around someones neck. It can start the snowball effect. This is where banks got stuck also. They never accounted for the lowering of asset values. They are supposed to be the back stop and maintain enough strength to withstand defaults. Mark to market is in place to protect the economy but when the government comes in and basically says to the banks that we are going to let you slide for a while even though your forecasting and reserves are inadequate, it prolongs the cycle and prevents mark to market rules from cleaning out the system quickly and efficiently, then it is virtually worth $0.

Mark to Market chatter

Congress is talking about changing Mark to Market rules for the banking system. (mark to market means that assets are given the same value as other similar assets.) In today's market their are billions of dollars of bank assets that no one wants to buy at any price. There is no way to price these assets any anything much over zero. The alternative to Mark to Market is mark to model. The bank would be allowed to speculate as to the current and future value of a mortgage or an asset based on their opinion or estimation of the quality of the borrower or the asset.

The mark to model allows banks and bankers to get away with pushing potential losses out to future years and in turn can make current earnings look far better then they appear to be using Mark-to-market. For years banks were able to cloud their true earnings or true value of assets by using mark to model. The congress is only talking about mark to model again because they see no way out of the financial crisis if they accurately price the current bank assets. Imagine you wanted to sell your house and decided that it would be worth 100,000 more in 10 years and then expected to be paid that price today. Mark to model is similar to this and is nosensical. It will be the biggest scam of the American tax payer if the government guarantees or buy these toxic assets held by banks at any other price than current value.