Subject: File No. 4-573
From: Khadid Gueye

November 12, 2008

Actually, the U.S is facing a financial crisis that is affecting financial institutions, government, public, families, and individuals. In order to stimulate the economy, the government has proposed a bailout of $ 700 billion, and whether or not the mark-to market accounting rules should be eliminated, or given a break. Because, in the public debate, many are taxing mark to market accounting rules as one of the major causes of this financial crisis.

To work on the emergency of the economic crisis, the SEC has opened a public debate called Study on Mark- to-Market Accounting in order to get people s opinion for further decisions. The purpose of this paper is to provide ideas on the inquiries of the SEC which are: how such accounting standards have affected financial institution s balance sheet the impacts they have on bank failures 2008 the impacts they have on the quality of information available to investors the process used by FASB in developing those accounting standards the advisability and feasibility of modifications to such standards, and alternative accounting standards to those provided in such Statement Number 157.

Mark to market accounting has an impact on the financial institution s balance sheet that can not be ignored. Because, every time a financial institution makes purchases of financial assets, these purchases are recorded on its balance sheet. However, the value of the balance sheet changes according to the market it is recorded according to its value.

And now, in the world s banking industry financial institutions have stopped trading lots of the bonds that they usually trade with one another. The only circumstance when trading or selling is taking place is if an institution is desperate to sell. (1) By acknowledging that, the financial institution would want to purchase with a price that is below the market value. Under the mark to market rules, the financial institution has to record on its balance sheet the value of assets sold if they have the same kind of assets.

To better illustrate, let s take for example an institution that is intending to purchase stocks from another financial institution at 30 % below the price. And whenever this transaction occurs, that is mark to market. So all institutions that have the same assets have to record that price in their statement, which cause a degeneration of the balance sheet.

Because of the mark to market rules banks can not avoid liquidity crisis. And as we know, banks are suffering of liquidity crisis because of the foreclosures of millions of homes. Sixteen U.S. banks and savings and loans have failed so far this year, including Washington Mutual Inc., the biggest bank collapse in history. (2)

The fact is mortgages are packaged into pools called Collaterized Debt Obligations (CDO), and the value of these CDO has declined. Whereas, investors of financial institutions, carry CDO on the books as assets.(3) And since these CDO have declined in value, banks have to increase the amount of their capital. That is where mark to market accounting plays a role, because it requires that institutions have to reduce the value of the CDO on their books as their values decline, even if they plan to hold to maturity. As those values decline, banks need to raise more capital to meet capitalization rules. (4) Indeed because of these housing foreclosures, investors don t take the risks to invest on those financial institutions.

That is why mark to market is helpful for investors because it permits investors to have a real insight of a company s health when their assets are fairly priced. With such accounting rules, investors are aware of the assets real values as recorded in the bank or companies balance sheet. Investors can not trust these financial institution s balance sheet without mark to market accounting rules. In other words these accounting standards are protectors for investors.

FASB is the private organization that establishes financial accounting standards and reporting. It has for purpose to establish and improve standards of financial reporting for the guidance and education of the public, including issuers, auditors, and users of financial information. (5) The economy can not work or go far without accounting standards all financial decisions are based on the information obtained because of the implementation of accounting standards. In order to success in the establishment of these standards, the FASB performs to: -

Improve the usefulness of financial reporting by focusing on the primary characteristics of relevance and reliability and on the qualities of comparability and consistency -Keep standards current to reflect changes in methods of doing business and changes in the economic environment -Consider promptly any significant areas of deficiency in financial reporting that might be improved through the standard-setting process -Promote the international convergence of accounting standards concurrent with improving the quality of financial reporting and Improve the common understanding of the nature and purposes of information contained in financial reports. (6)
In my eyes, mark to market accounting rules has a significant and positive impact in the financial reporting that unable me to express an opinion for any eventual modifications of such standards. As for those who are for the implementations of these rules said it, suspending mark -to- market, in essence, suspends reality(7) Suspending the mark-to-market prices is the most irresponsible thing to do. Accounting does not make corporate earnings or balance sheets more volatile. Accounting just increases the transparency of volatility in earnings."(8) Indeed, one argues that blaming fair-value accounting for the credit crisis is a lot like going to a doctor for a diagnosis and then blaming him for telling that you are sick. (9)

Rather of modifying these accounting standards, the SEC should debate on Bush administration proposal for the bailout of $700 billion, which seems to be a good idea for restarting the economy.

There are some other measurements such as historical cost, current cost, replacement cost, and net realizable value that might be used to replace the fair value measurement. However, as I said earlier the fair value measurement, which is also the statement 157 of FASB, is currently the best way of measuring fair value of assets. Because, Fair value is reasoned to be the most relevant measurement basis because it reflects market risk preferences and market expectations with respect to the amounts, timing and uncertainty of future cash. (10) Fair value is useful for creditors, investors and all potential financial users in gathering information for business and investment decision since it gives a picture of the current market value by assessing the degree of an asset to generate future cash flows.

(1) L. Little ( 2008). Main Street Explains: Mark to Market Accouting Retrieved on September 30, 2008 from
(2) M. Gordon ( 2008). Debate continues over bank accounting rules Taiwan News retrieved on October 30, 2008 from
(3). (2008)
(4). (2008)
(5). (2008) Facts about FASB retrieved from
(6). (2008) Facts about FASB retrieved from
(7). (2008) B. Brooke, global vice chair at Ernst Young LLP as cited on Mark to Market Quotes Retrieved on September 30, 2008 on
(8). (2008) D. Mott, JPMorgan Chase Co., Bloomberg as cited on Mark to Market Quotes Retrieved on September 30, 2008 on
(9) (2008) D. Garnick, Invesco Ltd., Bloomberg as cited on Mark to Market Quotes Retrieved on September 30, 2008 on
(10) Fair Value, Historical Cost, Replacement Cost... How Should Assets retrieved from