I don’t deny that your suggestion would work, although it will never fly in today’s DC.
My understanding of MTM is that it has crushed the underlying values due to illiquidity not due to the actual value of the assets. Is that right?
I know that there has been a depreciation of value in the market in general, just that MTM is not reflecting the true value say 75%, but marking it down to zero.
MTM does have problems. Illiquidity obviously makes it difficult to guess what the market would actually pay if you put those securities up for sale Monday morning.
Also, MTM doesn’t allow for valuing performing assets based on keeping them to maturity. That’s flawed. We should *want* banks making loans with the intention of holding, rather than selling to Wall Street, lots of their loans. And we should want those loans to perform.
So a pleasant MTM reform would be to allow for securities that are performing (i.e. people making their mortgage payments on those particular loans) to be valued based upon their cash flow...instead of what the Market would pay for those loans if firesold today.
MTM’s flaws work on the way up, too. It’s not just a flaw in a down market. You get overvaluations when the market heats up.