Mark-to-market means that companies have to report what the fair value of their investments were if they sold them at the current time.
In recent years, firms were required by the Securities and Exchange Commission and the Federal Accounting Standards Board to use mark-to-market valuations for all the MBS on their books.
As more subprime borrowers started to default on their loans, that quickly eroded the value of many MBS pools. Major banks and financial firms around the globe have taken writedowns topping $500 billion in the last year, as a result.
For this reason, some have argued that fixing the rule would solve the credit crisis.
"The SEC has destroyed about $500 billion of capital by their continued insistence that mortgage-backed securities be valued at market value when there is no market," said William Isaac, a former chairman of the FDIC.
"And because banks essentially lend $10 for every dollar of capital they have, they've essentially destroyed $5 trillion in lending capacity," he added.
Isaac believes that since the overwhelming majority of loans packaged together in even the weakest MBS pools are not in foreclosure, it is proper to value these securities based on the flow of cash from all the loans instead of a non-existent market value.
http://money.cnn.com/2008/10/01/news/economy/mark_to_market/index.htm?postversion=2008100120
In recent years, firms were required by the Securities and Exchange Commission and the Federal Accounting Standards Board to use mark-to-market valuations for all the MBS on their books.
As more subprime borrowers started to default on their loans, that quickly eroded the value of many MBS pools. Major banks and financial firms around the globe have taken writedowns topping $500 billion in the last year, as a result.
For this reason, some have argued that fixing the rule would solve the credit crisis.
"The SEC has destroyed about $500 billion of capital by their continued insistence that mortgage-backed securities be valued at market value when there is no market," said William Isaac, a former chairman of the FDIC.
"And because banks essentially lend $10 for every dollar of capital they have, they've essentially destroyed $5 trillion in lending capacity," he added.
Isaac believes that since the overwhelming majority of loans packaged together in even the weakest MBS pools are not in foreclosure, it is proper to value these securities based on the flow of cash from all the loans instead of a non-existent market value.
http://money.cnn.com/2008/10/01/news/economy/mark_to_market/index.htm?postversion=2008100120
