From letters in
Wall St Journal;
Let me provide one example of the "irrationality" of mark-to-market. One year ago, an appraiser valued an old house on a half-acre of land close to the beach in Hawaii at $2 million. I tore down the house and built a nicer, bigger one at a cost of $850,000. Today, the bank appraisal comes in at $1.5 million. Why? Because the bank, to be "conservative," now only accepts appraisals done within the past three months. Nothing has sold on that beach for the past three months, so the closest comparable the appraiser can find is a similar property farther inland, where there is no beach premium. Now the bank must report a lower loan-to-value on its books for my loan, and I cannot sell the house for what it is worth.
So now the waiting game begins for the market to come back. The trouble is, if everyone waits, then the market will continue to spiral down like Japan's real estate market in the 1990s. Mark-to-market is indeed mark-to-madness.
Steven E. Connell
Honolulu
Golman Sachs CEO Lloyd Blankfein
argues that to employ a mark-to-market methodology is a more true and realistic approach to finance;
For Goldman Sachs, the daily marking of positions to current market prices was a key contributor to our decision to reduce risk relatively early in markets and in instruments that were deteriorating. This process can be difficult, and sometimes painful, but I believe it is a discipline that should define financial institutions.
Our friend in Hawaii complains that the market will not validate his estimation of worth yet he accepted the assessed market value when borrowing from the bank for his new house. He needs to reassess his situation in light of current market conditions - he may buy cheaper elsewhere.
