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Wednesday, October 1, 2008

Listen to the show

Exactly what is 'mark-to-market'?

Part of the Senate's financial rescue plan would suspend
something called "mark-to-market" rules of accounting. Jeremy Hobson explains
what that "something" is and what would happen if it went away.

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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.

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Comments

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By Bob Mitchell

From Redwood City, CA, 04/21/2009

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.

By Ron Perry

From Solana Beach, CA, 03/06/2009

What is the argument for keeping mark-to-market? Virtually all of the
advisors I hear are recommending that it be modified or suspended, so why
isn't it done already?

By Willis Lanier

From Arlington, VA, 10/03/2008

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.

By Michael Grossman

From Montclair, NJ, 10/02/2008

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.

By Jonathan Edelfelt

From El Paso, TX, 10/02/2008

It might be helpful to explain how banks would value their assets if they
don't use mark-to-market accounting.

By Ken Schulz

From Bethel, CT, 10/02/2008

So if mark-to-market is rescinded, can I pay off my mortgage in Beanie
Babies?

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