Counter-Point: If there is no market, or no efficient/liquid/… market, mark-to-market becomes Slumlord’s “mark to myth” at best. At worst, otherwise healthy institutions may face huge paper losses with attendant ill effects. The fact that firesale prices have persisted so long may reflect the assets’ true value, but it may just be a product of frightened and cash-starved market players’ uncertainty in the post-MBS-meltdown wasteland.

Conversely, in a bubble market, mark-to-market creates ephemeral paper gains that encourage investments in companies with tulips on their balance sheets.

Mark-to-market may be better or worse than its predecessors, but it’s certainly not perfect.

The central issue is how to manage the reality of the variance of asset and liability valuations in real time (annual and quarterly reports). While the propose fair value measurement methods specified in FAS-157 have led to significant problems for some financial companies, the reality is that the assets on their balance sheets has dropped precipitously. As Al Gore would say, that is an inconveient truth. This is no different than people who are looking at “paper losses” in their IRA of 40-50%. That is the reality. If that person is say 40, he can argue that 25 years from now this current dip is of no consequence. If that person is 70, he has some real issues. Regardless, the drop is what it is.

Another objection I hear from accountants is that FVM creates too much “paper” fluctiuations in assets and liabilities which extend over to the income statement. That is another story for another day. One which seems as though it can be addressed through FASB amendments.

But mostly, there seems to be an inherent discomfort with the concept of fixed asset valuations fluctuating. In my experience, accountants are simply loathe to live in a world where fixed asset valuations flucuate because fixed assets are supposed to be, well … fixed.

As something of an outsider, my impression is that, among other things, FVM bring to light the uncertainty in asset and liability valuations. And by extention, the uncertainty can create risk. I submit that FVM should be used to identify uncertainty and risk, and had it been properly employed earlier in this cycle, maybe corrective action would have been taken bginning in 2006 or maybe even 2005.

Banks and insurance companies should have known and should have reported that the risky positions they were taking might lead to a future need for extensive capitalization. If they did not possess the wherewithal for this possible outcome, they should not have taken on the risk. It seems to me that the original sin of FAS-157 is that it compels corporate officers to see the truth and to tell the truth. I, for one, can live with that.

The problem with mark to market is however, when market conditions are “irrational” but irrational is usually measured from the point of view of the asset holder. The “firesale” that the banks are complaining about, has been going on for close to 18 months now. The market is probably accurately pricing these assets.