Understanding the Significance of Mark-to-Market Accounting

Barry Ritholtz nails it:

I have been steadfast over the past 2 years about why I did not want to own any of the financials that held this paper on its books. The key was that we could not figure out what the liabilities were relative to the assets. That is investing 101.

If FASB 157 is suspended, I would advise our clients and the investing public that owning any financials that failed to disclose their holdings accurately were no longer investments -- they were pure speculations, with more in common to spinning a roulette wheel than owning Berkshire Hathaway (BRK) or Apple (AAPL) or Google (GOOG). Indeed, I know of no faster way to end up on the DO NOT OWN list than to hide from your shareholders what is on your books.

If investors cannot trust the valuations of what is on a firms books, they simply cannot invest in these firms PERIOD.

Free markets require a certain amount of trust to function. Just as the shady behavior of a street vendor makes a potential customer wary of purchasing the vendor's goods, so hiding behind accounting rules, as imperfect as those rules may be, makes a bank seem "shady" or suspect. This damages trust and disinclines potential investors, customers and business peers from engaging in business transactions with these banks.

With the erosion of trust having already reached critical levels, it is difficult to understand why steps would be taken specifically to erode trust further. However, that is precisely what suspending mark-to-market accounting accomplishes!