Mark to Market

I'm a huge fan of Dave Ramsey, but as I've been busy keeping up with things at work lately, I haven't spent a lot of time listening to his show. So today as I was walking the dog I listened to a couple shows from last week.

As you would imagine, the main topic of discussion was the financial crisis and the pending bailout. Dave spent considerable time in a "teaching" section of the show saying that one of the primary causes of this financial crisis was the "mark-to-market" rule in Sarbanes Oxley. Dave urged his thousands of listeners to call their congressmen and congresswomen and demand that they change the mark-to-market rule.

So what is mark-to-market? It's an accounting rule that says that when a company is valuing the assets on their books, they should use the market value (rather than the price that they paid, for example). Sounds reasonable, right? It's a market-based approach to determining the value of assets.

So how was mark-to-market involved in this crisis? It turns out that the investment banks were not only selling a lot of these CDOs (the mortgages bundled into bonds) to investors, but they were keeping a lot for themselves (not sure if it's because they really wanted them or if they just couldn't move them fast enough). As these CDOs plummeted in value on the market, these banks had to update their books to reflect that the value of their assets had decreased.

So what would eliminating the mark-to-market rule do? Without mark-to-market, the banks could claim that the CDOs were still worth what they paid for them. It would allow any public company inflate their balance sheets by hiding the true value of their assets.

Don't we want (shouldn't we demand) transparency from our public companies? Of course. So which is the correct valuation of assets? The market value of course! That's what the market does! I'm sorry to say, Dave, but removing the transparancy and hiding the problems under a rock is NOT a solution. Most every economist is saying so; it's only in the political arena that this is being discussed ... so why is that?

Much like the "blame the poor for it" approach, the "blame regulation for it" approach is the next best thing for Republicans who thought that free markets would solve any problem. So Dave urged his thousands of listeners to call their congressmen and congresswomen and demand that they change the mark-to-market rule. As I mentioned, these shows were from a week ago, so I can only assume that Dave and others like him were part of what caused House Republicans to have their "the Democrats will have to pass the bailout" moment last week.

I predict that in four years, as Republicans are preparing to run against an incumbent President Obama, that they will resurrect this theory of over-regulation as both the cause and the neglected solution for the financial crisis of 2008. Don't buy it!