What is “Mark to Market?”

ABC News’ Daniel Arnall reports: It seems like some of the discussion on Capitol Hill is turning to a change in accounting rules to address the current seizing of the credit markets.

Here’s a look at what people are talking about when they’re addressing “Mark to Market” accounting rules:

* The mark to market rule (also known as "fair value" accounting) went into effect Nov. 15, 2007.

* It’s a requirement created by the Financial Accounting Standards Board (FASB) – which has since 1973 been the designated organization in the private sector for establishing standards of financial accounting and reporting. Those standards govern the preparation of financial reports.

* The mark to market rule forces public companies to put a “fair value” on their assets or liabilities each quarter. Meaning, if they hold a security on their books, they have to report the actual market value of that asset instead of the price they’d hope to get at some future time.

* Under the FASB’s definition, fair value is the price “in an orderly transaction between market participants.” And it’s not just any buyer. The rules require the buyer to be “knowledgeable, having a reasonable understanding about the asset or liability and the transaction based on all available information.”

* Because there’s no market at this time for the mortgage-backed assets that many banks and financial institutions have invested in, the institutions are taking massive write-downs on these assets quarter after quarter.

* Bloomberg reports that this year the market to market accounting rule has wiped out more than $100 billion in asset values tied to home mortgages and loans issued to finance acquisitions as those loans have started to fail at historically high rates.

* It’s not just about write-downs. It also allows companies that hold assets that have appreciated in value to realize those gains right away – for example, the oil/gas industry holding massive reserves of oil that have recently appreciated in value.

* A change in the standard wouldn’t change the value of the assets, but would likely slow the write-downs in companies are being forced to take each quarter.

* Critics say changing this rule wouldn’t actually bring participants back to the market or increase buyer interest in mortgage-backed securities; it would simply allow companies that purchased these investments to keep their exposure to the mortgage markets out of public view.

* Newt Gingrich (and the rest of the conservative American Enterprise Institute) is pushing this idea.

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