A Solution for Mark to Market

Much, if not all, of the current economic crisis has been caused by the government's changing rules on valuation of key bank assets. It can be debated whether these changes were purposely caused in order to seize political control in Washington, but there is no need to comment on that in this article. What does need comment is the incredible power that can be exerted over the entire global financial system through manipulation of accounting rules!

This article is straight-forward: right now, politicians and regulators are wrangling over whether to value bank assets using mark-to-market or mark-to-model. The solution is essentially: "both" and "neither"!

There is one other valuation standard that is amazingly simple to understand: mark-to-performance. This standard simply requires valuation based on the actual income performance of the underlying asset. An asset that is generating income is doing so at a very measurable rate of return. This is a standard that even anyone on the street can understand! Wow!

But, let's not get too simple -- otherwise we will lose all the sophisticated New York bankers, experts, and politicians! The basic problems with mark-to-model and mark-to-market also exist with mark-to-performance. All three, under certain conditions, will not reflect true, long-term value of the underlying asset. But, the three, together, will reflect that true, long-term value of the underlying asset. This makes the solution rather straight-forward.

The solution is to allow banks to value each asset based on the middle valuation chosen from the three standards: mark-to-model, mark-to-market and mark-to-performance.

When there is no liquidity in the market, as we have seen over the past several months, then the mark-to-performance and mark-to-model will provide a higher (and more accurate) valuation. The middle one, probably mark-to-performance, will be the appropriate model to use during these economic times. In times of "irrational exuberance", then the mark-to-market may very well exhibit the highest valuation. In those economic times, either the mark-to-performance or mark-to-model will be the middle ground. Again, that middle model will be the appropriate model to use during such economic times. The examples go on....

So, the only problem with the Mark-to-Performance & Middle-of-the-three approach is that it will leave regulators with little to do and politicians with no red-meat. It does not enable seizure of political and industrial control of entire nations (even ones the size of the United States). It does not create new Hitlers, Stalins, Regans, or Napoleons. So, except for this lonely blog, Mid-3 and Mark-to-Performance will sit in the dark corners of idle thinking.

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