Did "Mark-To-Market" Rules Cause The Financial Crisis?
1. “Mark-To-Market” Versus “Historical Cost” Accounting
2. Mark-To-Market Accounting and the Great Financial Crisis
3. FASB Relaxed Mark-To-Market Rules in March 2009
4. Surprise: Trump’s Tax Cuts Help Low Wage Workers the Most
Last Saturday, September 15, 2018, marked the 10th anniversary of the Lehman Brothers bankruptcy, which set off the worst US financial crisis since the Great Depression. It was the largest bankruptcy filing in US history, with Lehman holding over $600 billion in assets.
Lehman was the fourth-largest US investment bank at the time of its collapse, with 25,000 employees worldwide. Lehman's collapse was a seminal event that greatly intensified the 2008 global financial crisis.
The bank had become so deeply involved in mortgage origination that it had effectively become a real estate hedge fund disguised as an investment bank. At the height of the subprime mortgage crisis, it was exceptionally vulnerable to any downturn in real estate values.
The bankruptcy triggered a one-day drop in the Dow Jones Industrial Average of 4.5%, the largest decline since the September 11, 2001 attacks. It also ushered in the worst recession since the Great Depression.
The 10th anniversary of Lehman’s bankruptcy has also reignited the debate on whether the implementation of “mark-to-market” accounting rules in late 2007 – which resulted in large losses for many commercial banks – triggered the financial crisis. In retrospect, many analysts and forecasters believe the answer is YES. Count me as one who agrees that mark-to-market was a huge factor in causing the financial crisis.
My sense is that most investors don’t really understand mark-to-market accounting, much less whether or not it caused the financial crisis, so that’s what we’ll talk about today.
“Mark-To-Market” Versus “Historical Cost” Accounting
Without getting too far out in the weeds, here is a brief summary of mark-to-market (MTM) accounting. My apologies to the CPAs and accountants reading this who know far more about MTM than I ever will.