Friday, March 6, 2009

"Mark to Market" Curse to Banks

As I understand it, a Security and Exchange Commission ruling called "Mark to Market", contributed, in many economist's opinions, to the current banking crisis. In simple terms, significant banking capital was supported by mortgage backed securities. When property values began to fall, these securities were required to be written down, even though most mortgages (93%), on a long term basis, retained their original value.

Banks are required to maintain a certain amount of capital base, so banks suspended loaning their cash to preserve capital.

Acording to Steve Forbes, the banks have plenty of cash to loan, and if the "Mark to Market" ruling were amended or suspended, the banking system would be on the way to recovery. This is with only the stroke of a pen, and no taxpayer infusion of billions of $.

Of course our government would prefer to waste hundred of billions of taxpayer dollars on the bailout of the banks and insurance companies rather the try a very practical step in solving the crises they created.

Update: April 4th - The FASB today relaxed the Mark-to-Market rule to allow banks to revalue certain mortgage backed investments.

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