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Don’t Shoot the Messenger: In Defense of Mark to Market
September 28, 2009 by Neil · 2 Comments
A recent blog posting lays great blame for our financial crisis, and attendant commercial real estate meltdown, on mark to market accounting practices. The argument is that marking to market, or MTM, will drive everyone to the exits simultaneously. This will further depress prices, and force banks to make unneeded writedowns.
Marking to market a distressed asset is like holding it up to a mirror. It may not be pretty, but it’s an accurate reflection. Not marking to market is like hiding it under a blanket, and taking the blanket-owner’s description at face value. Why should that biased view be trusted? That’s what banks are doing now with their creative accounting. They are assigning values to these toxic assets with little to no basis in reality.
MTM allows for transparency, consistency, and uniformity. It removes all the blankets, all the veils. In the absence of MTM:
1)buyers will continue to refrain from buying properties because they can’t accurately gauge value
2) lenders will continue to refrain from vigorous lending. Their underwriters can’t accurately gauge property value. Furthermore, too much of their new capital shores up their balance sheets, riddled with toxic assets.
It may cause quite a shock to the economy to force banks to mark their toxic assets to market. So many of the big (Too Big To Fail, or TBTF) banks made the same calculations simultaneously. Only this was not akin to Leibniz and Newton duking it out for the prestigious claim of who first invented calculus. This was a competition to see who could make more bad investment choices than Iceland.
Once MTM is done, it will have the beneficial effect of forcing bloated zombie banks to deconsolidate or close. Until that happens, our economy, and the commercial real estate market, will not get out of the ditch.
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