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Mark to market

Mark to market is an accounting term. Assets on the financial statements of a business are supposed to be carried at the lower of cost or market. When the market value of an asset declines sharply, the business is supposed to write down the value of the asset to show its new market value. This is called marking to market. But the write down must also appear on the earnings statement, reducing earnings and affecting bonuses paid to key executives. Hence, they are reluctant to write down assets, and usually delay the event as long as they can (and with numerous excuses).

Expanded Definition

Mark to market has been in the news recently in connection with the subprime mortgage debacle. Mortgage investments on the books of major investment houses could not be sold at face value because some of the underlying mortgages were expected to default in spite of their AAA rating. Buyers demanded a severe discount to compensate for the risk. Hence, the market value was far below the value of the asset shown on the books. Investment houses decided to write off these losses in a series of write-offs, writing down the weakest investments first, and holding on to the others in hopes that they might eventually realize a higher market value. But as time goes on, more and more write downs are announced as executives realize recovery will take longer than originally hoped.

Mark to market is most often a concern with publically traded financial institutions. They may carry loans on their books at face value, but news events can cause realization that the assets are no longer worth face value. This forces a write down. Less frequently, manufacturing businesses can also be forced to write down assets if they build a plant to make a product and then find it necessary to discontinue the business before the plant investment is fully depreciated. In the chemical industry toxicity discoveries have caused several of these write-offs. A recent one was MTBE. An earlier one was NTA. Writedowns can also be necessary when a product in inventory becomes obsolete and is no longer saleable or must be deeply discounted.

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