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September 30, 2008

Boost For The Economy - SEC Ease "Mark to Market" Rule

Topics: Political News and commentaries

Newt Gingrich has been saying that 70% of the crisis could be solved by suspending "mark to market" accounting, Gingrich believes that the action would calm the markets and dramatically reduce taxpayer risk in any future government intervention. In other words, Newt believes - and some economists agree with him, that much of the current financial crisis can be blamed to something as mundane as accounting.

This afternoon, the SEC did exactly that:

Simply put, mark-to-market accounting requires companies to set the value for the assets they own at the price they could fetch on the open market right now. The prices must be "marked to market;" hence the phrase.

What does that have to do with the current crisis? The root problem now is that financial institutions have been caught holding value-less, or "toxic," assets on their books, such as the mortgage-backed securities based on sub-prime mortgages that have defaulted.

The government believes that those assets will be worth something soon -- that's why they want to buy them in the $700 billion Wall Street rescue plan. But under mark-to-market rules currently required, they are worth almost nothing, threatening those who hold them with insolvency.

If the holders could place a value on the assets equal to the estimated value they should bring in the future, suddenly the balance sheets of these financial institutions would look a lot healthier.

Today's SEC rules clarifications do not end mark-to-market accounting. But they do let the holders of these low-value "toxic assets" to use other ways to value them, which probably will lead to an increase in their value, even though that is not the SEC's intention.

Newt Gingrich goes into a lot more detail on mark to market accounting and how it affects the economy - here ...

Posted by Mike in Iraq at September 30, 2008 10:15 PM

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