Why Mark-to-Market is Bad News for Shareholders
Jun 4th, 2008 | By Martin Hutchinson | Category: Stock Market InvestingSo what conclusions do we draw? Some possibilities:
- Agitate to have “mark-to-market accounting” outlawed by the Financial Accounting Standards Board. It makes business cycles more extreme, and allows management to play too many games and pay itself too many bonuses. The old system could be gamed too, but not as badly – if you wanted a bonus for an asset’s increase in value, you had to sell it.
- Don’t buy shares of financial service companies with “Level 3″ assets of more than their capital – that’s all the “Big Four” investment banks including Goldman Sachs, Merrill Lynch & Co. Inc. (MER), Morgan Stanley (MS) and Lehman Bros. Holdings Inc. (LEH), and most of the big commercial banks, too. Those Level 3 assets are probably worth very little in a real downturn, because there is no market for the assets and everybody else will be trying to sell them too.
- Expect more unexpected crashes and taxpayer bailouts. The mark-to-market system is highly unstable, and the value of illiquid assets can vanish in a downturn.
- Treat “mark-to-market” accounts with deep suspicion unless all the assets so valued are publicly traded on a recognized exchange.
Source: Why Mark-to-Market is Bad News for Shareholders
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Martin O. Hutchinson is a Contributing Editor to both the Money Map Report and Money Morning. An investment banker with more than 25 years experience, Hutchinson has worked on both Wall Street and Fleet Street and is a leading expert on the international financial markets.
Hutchinson earned his undergraduate degree in mathematics from Cambridge University, and an MBA from Harvard University. He lives near Washington, D.C.
