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Mark-To-Market Accounting – The Boogeyman Of The 1930s Is Back

I won­der how many peo­ple real­ize that that FDR got rid of mark-to-market account­ing in 1938 after it vir­tu­ally destroyed the bank­ing sec­tor. Accord­ing to Brian Wes­bury and Robert Stein mark-to-market account­ing was the law of the land for most of the Great Depres­sion until it was out­lawed by FDR in 1938. Wes­bury and Stein report that the ratio­nal for mark-to-market account­ing in the 1930s seems sim­i­lar to today’s argu­ment for the rule; the need for greater price trans­parency based upon the effi­cient mar­kets hypoth­e­sis in the bank­ing sec­tor. FDR rejected the argu­ments of the effi­cient mar­kets crowd because he thought that mark-to-market account­ing con­tributed to the Great Depres­sion. For approx­i­mately 70 years after FDR’s deci­sion banks oper­ated with­out mark-to-market account­ing and the econ­omy didn’t have the threat of another depres­sion. Years later Mil­ton Fried­man wrote that mark-to-market account­ing was respon­si­ble for the avoid­able fail­ure of many banks in the 1930s. Maybe it is just coin­ci­dence but imme­di­ately after mark-to-market account­ing was restored in 2007 the bank­ing sec­tor started into a death spi­ral. Unfor­tu­nately, even thought his­tory seems to be repeat­ing itself few peo­ple are try­ing to learn from the past. Evenso, today’s Con­gres­sional hear­ings on mark-to-market account­ing are hope­fully the first step towards stop­ping this ter­ri­ble man made eco­nomic disaster.

From the Wes­bury and Stein article:

….The his­tory seems clear. Mark-to-market account­ing existed in the Great Depression…Franklin Roo­sevelt sus­pended it in 1938, and between then and 2007 there were no pan­ics or depres­sions. But when FASB 157, a state­ment from the Fed­eral Account­ing Stan­dards Board, went into effect in 2007, rein­tro­duc­ing mark-to-market account­ing, look what hap­pened.

Two things are absolutely essen­tial when fix­ing finan­cial mar­ket prob­lems: time and growth. Time to work things out and growth to make work­ing those things out eas­ier. Mark-to-market account­ing takes both of these away.

Because these account­ing rules force banks to write off losses before they even hap­pen, we lose time. This hap­pens because mar­kets are for­ward look­ing. For exam­ple, the price of many secu­ri­tized mort­gage pools is well below their value, based on cash flows. In other words, the mar­ket is pric­ing in more losses than have actu­ally, or may ever, occur. The account­ing rules force banks to take arti­fi­cial hits to cap­i­tal with­out ref­er­ence to the actual per­for­mance of loans.

And this affects growth. By wip­ing out cap­i­tal, so-called “fair value” account­ing rules under­mine the bank­ing sys­tem, increase the odds of asset fire sales and make mar­kets even less liq­uid. As this hap­pened in 2008, invest­ment banks failed, and the gov­ern­ment pro­posed bailouts. This drove prices down even fur­ther, which hurt the econ­omy. And now as growth suf­fers, bad loans mul­ti­ply. It’s a vicious down­ward spi­ral…

…In the 1980s and 1990s, there were at least as many, and prob­a­bly more, bad loans in the bank­ing sys­tem as a share of the econ­omy. The dif­fer­ence was that there was no mark-to-market account­ing. This gave banks time to work through the prob­lems. At the same time, the U.S. cut mar­ginal tax rates and raised inter­est rates, which helped lift eco­nomic growth. Time and growth allowed those major bank­ing prob­lems to be absorbed, even though roughly 3,000 banks failed, with­out cre­at­ing an eco­nomic cat­a­stro­phe…

…In the 1930s, because mark-to-market account­ing existed, we lim­ited the amount of time avail­able to fix prob­lems…

…Any­one wor­ried about repeat­ing the errors of….the U.S. in the 1930s should focus on the poli­cies that impeded recov­ery. Sus­pend­ing mark-to-market account­ing is a cost-free way to buy time. It does not allow banks to sweep bad loans under the rug. Bad loans are still bad loans, and banks can­not hide from them. Not sus­pend­ing it, while at the same time inter­fer­ing in the econ­omy with mas­sive stim­u­lus and bank nation­al­iza­tion, is a recipe to under­mine both time and growth and there­fore hurt the econ­omy even more.

The mark-to-market prob­lem is par­tic­u­larly baf­fling to me. I don’t under­stand why the U.S. has to keep on repeat­ing the mis­takes of our fathers and grand­fa­thers. Is it hubris? Do cur­rent finan­cial lead­ers and pol­icy mak­ers believe that they are smarter than past gen­er­a­tions and don’t need to learn from the past?


The list of rea­sons why mark-to-market account­ing is a bad idea and should be elim­i­nated is really long. But the biggest rea­son is that it is blamed for killing banks and help­ing put the U.S. into a deep depres­sion. We shouldn’t be test­ing fate to see if the blame is mis­placed or not. Instead, mark-to-market account­ing should be re-repealed and FDR’s 1938 deci­sion should be reinstated.


Today the House Finan­cial Ser­vices Com­mit­tee held hear­ings on mark-to-market account­ing and FASB announced that they are going to rework the rules. Hope­fully we will fol­low FDR’s exam­ple and this ter­ri­ble account­ing rule will be rejected as a finan­cial boogey­man that has come back from the dead to ter­ror­ize us.

Posted in: BANKS, Credit Crisis, Depression, economy, FASB, FDR, Finance, Great Depression, Mark to market accounting, Public Policy


  1. rob

    Mark, Great post. Many of us have been argu­ing, for over a year, for some ver­sion of hold to matu­rity val­u­a­tion or oth­er­wise, but this post really puts the issue in his­tor­i­cal con­text and illus­trates its tox­i­c­ity.

  2. Po

    I agree a lot of what your say­ing, but mark-to-market account­ing is a inter­na­tional trend cur­rently. As more coun­tries are adopt­ing the IFRS, the FASB com­mit­tee may have felt pres­sure to alter its poli­cies in order “catch up” with the inter­na­tional stan­dards. Unless nations around the world stop adopt­ing IFRS it is unlikely that the US would sus­tain its GAAP; doing so would result in many prob­lem, for exam­ple: com­pa­ra­bil­ity etc.

    Again i do agree mark-to-market may not be the way to go. As of cur­rently, mark-to-market has only exac­er­bated the situation.

  3. javier g mora

    The road to recov­ery will be via restored con­sumer con­fi­dence in the econ­omy. Imme­di­ate enforce­ment of exist­ing reg­u­la­tions and new rules arrest­ing the naked short­ing of all finan­cial instru­ments will have an impact. Stock and bond mar­ket prices do mat­ter. Let’s trans­fer the fear from the aver­age cit­i­zen to the spec­u­la­tors and prof­i­teers that put us in this posi­tion. Fed­eral reg­u­la­tors could at least start with the following:

    - rein­state short uptick rule
    – pro­hibit naked short­ing of all finan­cial instru­ments
    – finally reg­u­late CDS trad­ing
    – pub­lished the list of hedge funds that are SHORT (just like the SEC requires LONG investors to dis­close their posi­tions)
    – inves­ti­gate rumor mon­ger­ing on CNBC, WSJ and other news media
    – announce it will inves­ti­gate and con­fis­cate ille­gal prof­its gained from manip­u­la­tion of finan­cial mar­kets and news media
    – announce a review of the FAS 157 mark to mar­ket account­ing rules

    Thank you,

  4. Tom


    Sorry to inform you but mark to mar­ket has absolutely noth­ing to do with bank fail­ures or the eco­nomic cri­sis that we are in. The “cause and effect” analy­sis that you have applied in your arti­cle “Mark-To-Market Account­ing – The Boogey­man Of The 1930s Is Back” is mis­lead­ing at best.

    The fact of the mat­ter is that the fed­eral reserve board and frac­tional reserve lend­ing are the cause of all asset bub­bles and their even­tual destruc­tion. The fact that you blame a per­fectly good account­ing rule indi­cates to me that either you and/or your firm hold assets whose val­ues are being destroyed by mar­ket forces and stand to ben­e­fit from a m-t-m rule change.

    Free mar­kets must be allowed to adjust the risk reward rela­tion­ship to a proper bal­ance. If you think that the mar­ket has it wrong and that every­thing is under­priced then feel free to buy up these mis­priced assets and suf­fer the con­se­quences. A lack of trans­parency won’t solve any­thing because shit stinks regard­less of how it is packaged.

    Of course you already know this but strive to remove trans­parency which is the pre­cur­sor to bilk­ing investors and the taxpayer.

    You are a wolf in sheep camouflage.

  5. Dean Petkanas

    Dear Mark:

    SFAS No. 157 defines “fair value” as fol­lows: Fair value is the price that would be received to sell an asset or paid to trans­fer a lia­bil­ity in an orderly trans­ac­tion between mar­ket par­tic­i­pants at the mea­sure­ment date.

    IFRS gen­er­ally defines fair value as “the amount for which an asset could be exchanged, or a lia­bil­ity set­tled, between knowl­edge­able, will­ing par­ties in an arm’s length trans­ac­tion” (with­some slight vari­a­tions in word­ing in dif­fer­ent standards).

    These dif­fer­ences were cov­ered in the SEC review of Mark to Mar­ket Accounting.

    I believe a move to IASB stan­dards will help in the long run as it lib­er­al­izes but doesn’t elim­i­nate the need to pro­vide for more trans­parency on the types of com­plex invest­ments being carried.

    Obvi­ously an elec­tronic exchange would be a major boost to the appli­ca­tion of marks on past/present/future entry and exit pric­ing and the ISE and other clear­ing agen­cies will be big play­ers in this regard.

    As per the arti­cle, it spends a lot of time dis­cussing FDRs assess­ment of M2M and the Great Depres­sion. Bernanke, a noted his­to­rian on this era, does not con­cur on the elim­i­na­tion of M2M account­ing, but rather, he sug­gests improve­ments to the model so as to not forgo transparency.

    Most impor­tantly, banks got in trou­ble in spite of M2M account­ing and took on inor­di­nate lever­age on orders of mag­ni­tude that would cre­ate an imme­di­ate mar­gin call in any envi­ron­ment (stocks, bonds, com­modi­ties, etc.). Call­ing M2M the time ban­dit and cul­prit is like say­ing, with­out the stan­dard, the prob­lem could con­ceiv­ably got­ten infi­nitely worse. M2M account­ing and the FVO (despite the tim­ing in 2007), caused banks to be “account­able” to their risk mea­sure­ments, clearly out of whack in any stan­dard, notwith­stand­ing BASEL II.

    Kind­est Regards,

    The Mad Greek

  6. David

    It seems that my home is being marked to the cur­rent depressed mar­ket while try­ing to refi­nance away from a 5/1 ARM. Banks are want­ing to run a dou­ble stan­dard. Screw the con­sumer and inflate assets to lever­age more. Mark to mar­ket isn’t the prob­lem, it is the banks under reserving.

  7. AURELIALucas31

    Accord­ing to my own analy­sis, bil­lions of per­sons in the world get the credit loans at dif­fer­ent cred­i­tors. Thence, there is good pos­si­bil­i­ties to find a col­lat­eral loan in all countries.

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