Subject: File No. 4-573
From: Anonymous Citizen

November 12, 2008

The effects of mark-to-market accounting on financial reporting by financial institutions.

In todays economy, mark-to-market accounting has had a negative effect on financial reporting. The accounting principle is inherently flawed due to the fact that the principle requires companys to value their assets at market no matter the markets condition. Mark-to-market principles fails to have the desired affect in illiquid and failing markets. This failure in accounting principle in turn forces companies to make lots of write-downs, which unfavorably manipulates balance sheets. It does not allow for healthier financial institutions to value its assets appropriately when it may be apparent that the market value is not an accurate representation of the assets value.

In favorable markets however, this problem is mitigated. In fact, in the right economic conditions, valuing securities and other instruments at the value they are worth currently on the market would provide the best method of valuation on the financial books. This is because assets are valued at what they are worth currently not the price they were ascertained at. It provides a fair assessment on the balance sheet of the assets value and of the institutions financial condition.

Potential market behavior effects from mark-to-market accounting.

As it is investors are apprehensive about investing money into the markets. Mark-to-market accounting is not the cause of the financial crisis but exacerbated the problem. Since the balance sheet has already been compromised by the fair value principles and the declining economic environment, investors who rely on these statements to make decisions, are deciding not to invest in a failing situation.

As a result, the financial institutions must now pay higher funding costs for capital. The erosion of investor confidence forces financial companies to sell their assets at lower costs than expected. This in turn makes obtaining capital equity more expensive.

In addition, suspending the principle of mark-to-market accounting may deepen the already horrible economic condition. Doing such will further intensify investors apprehension and confusion. As such speculation has already irrationally driven asset values in markets downward and suspending fair value accounting will only exacerbate the situation. This will result in fewer investors willing to invest with so much uncertainty about the condition of the market.

The usefulness of mark-to-market accounting to investors and regulators.

Mark-to-market accounting provides the best method of valuation for actively traded assets. Since the principle provides a fair valuation of assets on the balance sheet, it enables investors to then make sound decisions based partly on that information. Other alternatives to mark-to-market accounting do not accurately represent the value of assets which may mislead investors. In active and liquid markets this approach to valuation greatly minimizes the potential for the misstatement of asset values as a result of stating at historical cost. It avoids calamities such as the U.S. Savings and Loan debacle of the 1980s and improves transparency to the investor. Since historical cost and fair value accounting are the only two viable options at this point, mark-to-market accounting is the lesser of two evils.

The principle also allows for ease of implementation and enforcing. Mark-to-market accounting has already been characterized within the guidance that FAS 157 provides. With mark-to-market, the SEC no longer needs a great deal of evidence from the institution being investigated as to the justification of its values from the use of alternative methods of valuation. Appropriateness of valuation under the fair valuing principle can be divulged timely and impartially from numerous outside sources.

Aspects of the current accounting standards that can be improved.

Neither mark-to-market or historical cost principle is the solution to the problem of valuing certain financial instruments. Valuing at fair value, however, is the best method of valuing actively traded securities and financial instruments for financial institutions. Tweaking the principle and making it adaptable to various economic conditions should be explored. Expanding FAS 157 to manage these issues of fair value accounting could be a possibility.

Providing guidelines for valuing at market when markets are inactive or illiquid would alleviate many problems. Also instead of generalizing certain types of financial instruments must be valued to market, identifying specific types of securities and assets that would be best valued under this method would prove a better measure on the financial statements and avoid severe misrepresentations. Recognizing that financial instruments are financial institutions fixed assets means that consideration should be given. That said historical cost is not the solution. This problem will need a thorough reassessment of the issues involved and a solution that is not only viable in various market conditions, but able to cope with a majority of unforeseen problems.

Also reemphasizing the use of good judgment is essential. The consequence of just impairing and writing down the value of assets should have been somewhat apparent to the financial institutions. Reaffirming that executives, accountants, and officers must use their professional judgment to determine whether the actions they are performing are viable to the continued health of the company and its stakeholders.