What Do the Tests Say about Mark-to-Market Accounting?
As noted above, the stress tests did not generally value the banks’ assets by suggesting that they be marked to market. Only a small portion of the total of $200 billion in MBS were marked down to market levels, and then only if the supervisors did not believe that these assets had sufficient collateral backing to avoid further credit losses. The rest were valued on the basis of their cash flows. As many commentators had been arguing over the course of the mortgage meltdown, it was the process of marking bank securities assets to market that made them appear so weak. By valuing MBS on the basis of their cash flows, the stress tests made the consequences of this difference in treatment abundantly clear. If all the securitized assets had been valued at what they could be sold for in the market, the banks would indeed have looked seriously troubled. Instead, the overwhelming majority were treated as temporarily impaired. In addition, the Fed reported that a significant portion of the $400
