eFinancialCareers

What is it?

Marking to market is the term used to describe the process of adjusting the value of an asset to reflect the price you’d get for it if you sold it right now.

For example, you might have bought your house for $200k two years ago, but if house prices have fallen 25% since that time, marking your house to market would give you a price of $150k.

Marking to market is also known as ‘fair value accounting’. It is to be distinguished from 'mark to model' (working out the price of something according to a mathematical model) and 'mark to maturity' (the price of a product if you keep hold of it until its sell-by date).

What’s it got to do with the financial crisis?

Marking to market is at the heart of the credit crunch. The American Financial Accounting Standards Board has pushed hard for mark to market accounting, and in November 2007 it passed mortgage backed securities and CDOs to market wasn’t necessary.

Without mark to market, banks could, for example, simply hold any illiquid assets which no one wanted to buy on their books at the prices they’d bought them for, and claim that the fall in their price on the open market wasn’t relevant because they had absolutely no intention of selling them.

(Barclays Capital has, for example, used precisely this argument with regard to some of the writedowns. The problem was therefore made worse when desperate banks offloaded their hard-to-sell assets at bargain basement prices – all other banks were then forced to mark to market at the new low price.

On 1 October 2008, the US regulator, the Securities and Exchange Commission (SEC), decided that mark to market was actually making the credit crunch worse. As a result, it agreed to allow banks to ignore prices achieved during 'distressed sales' and companies to mark to maturity if they intended to hold toxic assets long term.

In doing this, the SEC hoped to reduce the need for future writedowns, reduce the need for banks to raise capital to meet those writedowns, and encourage them to start lending again.

Europe also relaxed mark to market accounting standards in Return to A-Z home page