Business Insight Zone

“Marking to market” is the practice of looking at the assets you hold, setting aside your wishes or assumptions about what they’re worth, and then finding out what the assets are actually worth in a real-world market as of now.

You can understand why many publicly traded financial companies aren’t thrilled about marking to market these days: with markets as volatile and negative as they’ve been, why explode your handy illusions of value, especially if you have faith (well-founded or otherwise) that you’ll end up selling these assets later on, when their values are more in line with the financial models your in-house economists have worked so hard to gin up.

Marc Andreessen points to a Bloomberg story that talks about the three levels for assessing “fair values” of assets and liabilities that were approved by the Financial Accounting Standards Board in 2006. These levels get kookier as they diverge farther from the actual workings of real-world markets as of now. The Bloomberg story classifies them as “mark-to-market,” “mark-to-model,” and “mark-to-make-believe,” and lambastes Wells Fargo for engaging in the tomfoolery of the third category.

Berkshire Hathaway chairman Warren Buffett is sympathetic to the Bloomberg view. In this short CNNMoney piece, he warns of how anything besides marking to market can turn into “marking to myth.” (He also gets in this crack: “I’d give a lot to mark my weight to ‘model’ rather than to ‘market.’ “) And Buffett is hardly singing a new tune: he said the same thing in Berkshire’s 2002 annual report.

A guess: Buffett will be proved right that “for a few institutions, the difference in valuations is the difference between what purports to be robust health and insolvency.” Some large publicly traded bank, mortgage company, or the like will collapse even after attesting to the SEC and its shareholders that its assets were intact via the mark-to-model method. And the accounting rules will be changed.  Until then, the wishcasting marking to model will continue.