Best short explanation of the mark-to-markets issue I have yet seen:
Imagine if you had a $200,000 mortgage on a $300,000 house that you planned on living in for 20 years. But a neighbor, because of very special circumstances had to sell his house for $150,000. Then, imagine if your banker said you had to mark to this “new market” and give the bank $80,000 in cash immediately (so that you would have 20% down), or lose your home. Would this reflect reality? Not at all. Would this create chaos? Absolutely.
More on this here (hat-tip Ramesh Ponnuru).
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Imagine if you were a bank manager, and the owners of the bank gave you $200,000 and told you toinvest it, and that if you invested it well, they'd give you a $1 million bonus every 3 months.
Then, imagine if you could arbitrarily determine the value of what you bought and report that to the owners of the bank every quarter.
You'd earn your bonus every month, wouldn't you?
Now imagine if you were lying to the owners of the bank, and suddenly, the owners found out what you were buying all that time was worthless magic beanstalk beans.
To expand on my previous comment …
There is no such thing as having “a $200,000 mortgage on a $300,000 house.”
There's no such thing as a $300,000 house … because that's just a made up number. You can't know if your house is worth $300,000 until you sell it. Up to that point, you're just guessing at how much your house is really worth on the open market.
That's why we have home appraisals. A home appraisal is just some guys opinion, based on other home sales, as to what your house might be worth if you sold it today.
Bank management gets bonuses based on profits. Profits are, in part, determined based on the claimed value of the securities purchased by the bank managers with the bank owners' capital.
If bank managers inflate the “claimed value” of the securities they purchase, they can inflate their bonuses. That's why there are mark-to-market rules.
Mark-to-market rules force bank managers to allow an outside third party (the market) to determine the value of the securities that the bank managers purchased with the owners' money. This keeps everyone honest.
Mark-to-market protects the shareholders of the bank from the management of the bank.
Who owns the bank?
Shareholders.
Mark-to-market protects shareholders. That's why the SEC requires it. The SEC is there to protect shareholders.
Now you have an idea of what happened in the family farming community twenty years ago. The message sent by Wall Street, “Get big, or get out.” ( of your homes ).