Mark to market is a seemingly innocuous term for the requirement that companies, banks, hedge funds, mutual funds and the like report the market price of the financial instruments they hold and trade.
Do you all remember the Enron Crisis? and all those related financial and accounting report frauds? That led to some of the serious economic devastations? By filing bankrupsies?
There is an act passed by 2 congressman after these unbelievable crisis.
The Sarbane OXley Act.
Under this act, all accounting books must be signed by the management team and the executive team of the company.
According to a small but powerful group of America's financial decision makers—mostly supply-siders and those in their thrall—the chief cause of the credit market meltdown is not folly, or reckless lending, or the demise of America's financial management. It's an accounting rule.
for the complex new financial instruments, the valuations became far more unstable. Many hedge funds and financial institutions had borrowed huge sums of money to buy assets for which there wasn't an active market. When that debt started to go bad, it triggered a chain of unfortunate events. In many instances funds were forced to sell assets to meet margin calls. Occasionally creditors would seize assets and sell them. (That's what happened to the Bear Stearns hedge funds that failed last year.) This spiraling activity had the effect of further depressing prices for such instruments. In some instances buyers disappeared entirely. The valuations of these new instruments also plummeted because of market psychology.
"[I]t is appropriate for you to consider actual market prices, or observable inputs, even when the market is less liquid than historical market volumes, unless those prices are the result of a forced liquidation or distress sale"
20700775 Article Entry #10
