Mark-to-Market Accounting Gets a Bad Rap

Mark-to-Market accounting is a rule of transparency -- companies have to discuss the fair value of assets on their balance sheet.  One can criticize the mechanics of the rule on illiquid assets or in times of extreme market distress (when there is a lack of a market equilibrium price) but one should not attribute bank's capital problems to the rule. Bank's capital problems come from two other sources, both legal:  1) Statutory/administrative capital requirements and 2) contracts (most, commonly swap agreements).  When a bank has to reduce asset values it can fail its legal or contractual capital requirements.  The legal capital requirements are the real problem and need revision -they are too inflexible.  The contractual capital covenants are the bank's own fault and can be defined however they want -they just were lazy and too content with simplistic language.  Modify mark-to-market accounting rules only to accomplish fair value transparency; modify legal capital requirements to account for market distress; and leave firms to draft better capital requirement covenants in contracts.