Monday, March 16, 2009

A Snake Swallowing Its Own Tail: Mark to Market and Real Estate Values

I’ve previously posted on the illiquidity of the real estate markets and the difficulty and consequences of valuing real estate using distressed sales (see here, here, and here).

Via Newmark's Door, National Review Online has a good summary of the impact of mark to market rules on banks. An excerpt:

Mark-to-market rules damage banks in two ways. The first is that banks have to treat losses on paper as though they were real economic losses, accepting fire-sale valuations of securities that they may not intend to sell. The second is that, because mark-to-market rules are used in assessing banks’ capital requirements, those paper losses can quickly become real losses when banks are forced to sell assets, often at an enormous loss, to raise enough capital to keep the regulators satisfied. Those pressured sales, in addition to locking in losses, tend to drive down the prices of similar assets, creating a vicious cycle of wealth destruction. The market becomes a snake swallowing its own tail.