Mark to Market

In an efficient, rational market where asset prices are set according to their likely future inflows discounted to the present at a realistic discount rate, marking to market is a great idea. Having written that, you probably get the jist of what I'm about to say next.

Markets go through periods of terrible inefficiency for indeterminable amounts of time. For example, banks (which rely on positive balance sheet capital to stay solvent) may experience such dramatic, irrational writedowns in the values of their assets (loans for example) that they could potentially be shut down, even though those loans will eventually be paid in full and the primary reason for their dramatic loss of value is irrational fear. In this instance, mark-to-market accounting is a terrible idea and may even cause nasty feedback loops, to the point where what began as an irrational selloff of a financial institution might become rational as other actors lose confidence and stop transacting with the institution. When that happens, the company is doomed, unless uncle Hank steps in with billions of dollars in bailout cash.

[example of S&L bailout and eventual loan repayment]