Economicoutlook.

• Author: Maley, Frank

Mark-to-market accounting forces companies to value securities at their current market price, but some bankers want the rule changed, arguing that is undervalues assets and needlessly depletes capital. It even has been blamed for accelerating the U.S. financial sector's meltdown last fall. Nonsense, says UNC Chapel Hill accounting professor Wayne Landsman, the sole academic on a panel the Securities and Exchange Commission convened in November to study mark-to-market--also called fair-value--accounting under the Troubled Asset Relief Program.

Did mark-to-market accounting hasten Wachovia's downfall?

When you lend to borrowers that aren't able to pay, it's going to result in asset write-downs. Wachovia and many other financial institutions were making very bad loan decisions. They were taking on debt in this Ponzi scheme of being able to pass it on to someone else. But like all Ponzi schemes, it broke down eventually.

So bankers are making the rule a scapegoat for their mistakes?

Of course, they are. You have to write down. The only question is: What are you going to write it down to? Write-downs have been required under U.S. accounting rules for a very long time. The only thing new is FAS 157, which provides guidance for determining what a write-down might be for financial instruments that have lost value. It says if you use fair-value accounting, here is how you are to determine the value of an instrument. There are only a small number of instruments, so far, that are required to be marked to market. Loans that you issue and are sitting on your balance sheet are not marked to market. Those are at amortized cost. If they lose value because borrowers are unable to pay, they must be written down.

How does mark-to-market work?

If there's an active market for the assets and there's an available market price, you've got to use that price. But the Financial Accounting Standards Board says if you don't have an active market, you can mark to model. Mark to model means make up the number, using a discounted cash-flow model with a variety of assumptions. Almost always, the mark-to-model number is quite a bit higher than the mark-to-market number, the number that is associated with the last trade.

Then why are bankers upset?

They claim their auditors, being conservative, force them to write it down to the lower market price even if nobody is buying. They complain bitterly about that. And FASB says, "Well, that's between you and your auditor. We're...