Of course Mark-to-Market Accounting = Mutually-Assured-Destruction for the banks in a non-functioning market environment like this. By definition there is no "market" to mark to; and so their capital base is non-existent? This issue has come up in waves throughout this entire crisis, and here it is again today with everyone nervous about what clearing price the TARPs will actually set! Clearly this needs to be addressed in concert with the liquidity provisions.
Why not approach the problem from an adaptive mechanical trading systems approach? For example, relative volume (a proxy for liquidity) based rules could be applied whereby M-T-M must only be applied when transaction volume for a given asset class during the last quarter has been say 70% (pick your threshold) or greater as compared to the adjusted average of the prior four quarters.
There could even be a gray-zone where it would be discretionary to the individual entity, allowing investors to weigh the well disclosed elections of one company over another. Then below another critical limit in classes with systemic implications, a mandatory book method could be required to avoid system-wide disruptions and failure.
The purpose would be to avoid "the madness" of balance sheet "death spirals" while limiting the need for discretionary regulatory intervention and market uncertainty. Something to think about vis-a-vis FAS 157 -- effectively a self-adjusting hybrid between past and present rules.
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