Is mark-to-market accounting rule driving financial crisis?


New guidance about how banks should show mortgage assets on their balance sheets will be released shortly. The key rule in question is the mark-to-market rule of the FASB (FAS 157) that became effective in 2007. Those in favor of this rule believe mark-to-market accounting provides vital insight into a companies' financial health. Those who want the mark-to-market rule suspended believe the rules have forced huge writedowns of mortgage-related securities and other financial instruments at a time when there is no market to sell these assets, worsening the current crisis in the financial industry.

Mark-to-market accounting (also known as fair value accounting) requires companies to value the assets on their balance sheets based on the latest market indicators of the price of those assets. Essentially, the asset should be on the balance sheet based on the price at which they currently can be sold. Since the market for mortgage-based securities is almost nonexistent, banks must write down the assets to near zero.