Is mark-to-market accounting part of the problem? Should it be replaced by discounted cash flow valuation?
In my opinion, maybe and no. (For those who don’t know, market-to-market accounting means that I have to hold assets on my balance sheet at the value for which I could sell them today, based on comparable transactions in the market. The alternative would be to allow me to use my internal projections for long-term cash flows to determine what my assets are worth.) People see mark-to-market as part of the problem because, on this view, banks are being forced to write down assets below what they are “really” worth, giving them paper losses and, more importantly, reducing their capital. Assume Bank A and Bank B are holding the same security (say, a CDO). Bank A has liquidity problems and has to sell that security at a “fire sale” and only gets 20 cents on the dollar. However, Bank B is convinced the thing is really worth 50 cents on the dollar. Nevertheless, Bank B is supposed to write it down to 20 cents on its balance sheet. First, I generally tend to the belief that if 20 cents is what
