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.
Agreed.