Mark To Market Morals

Mark to market accounting is fundamentally flawed in so many ways, but perhaps one of its most egregious failings is that it requires the holder of an asset to play a silly game of make-believe: “Imagine you’re going to sell this long term asset today, what do you think it’s worth?”

Let’s assume this asset is in year one of rock-solid, 30-year investment with absolutely no chance of failing. And it pays 5%. Now let’s say the market makes a dramatic short-term shift so rates are now suddenly at 10%. Do I lose a corresponding percentage of the value of my capitalization because some mope – who only wants to buy my rock-solid investment to flip it when rates fall again, says so?  Even if I have no intention of selling it for another 29 years?

That is crazy. That is mark to market accounting.

Markets go up. They go down. Over the next 29 years, the true value of that bond can only be determined by its performance. Market value changes should be disclosed, and are for transparency. But don’t focus capital reallocation for short-term price changes. The price of “transparency” is volalitility. Trying to value long-term assets to a tiny sliver of time and a price measured by something as capricious as the market is more than goofy given the damage it does not just to corporate balance sheets but also to peoples’ lives and careers. It is immoral.