Yep. This is the one thing that is completely under-reported about this mess. Mark-to-Market, I would argue, is the primary reason that the mess is as big as it is. It wouldn't have prevented this collapse, but it certainly has exacerbated it.
Here's the problem. The American electorate is economically and financially illiterate. Crikes, I heard Regis and Kelly discussing this yesterday morning, and it sounded like to first graders discussing where babies come from. Then at night on Leno, Jay and Kieth Olbermann took a stab at it and made Regis and Kelly look like Nobel Laureates.
As a result of America's stupidity, Obama is going to get away with riding this populist rage right into French-style economic socialism, and he knows it. Things are a little uncomfortable for him and Geitner, but that will improve and the outrage will give him cover to pass and sign sweeping economic reforms. What a mess.
"Mark to market" means the value of financial instruments is determined by it's selling price. With rational actors, the sale price is a good measure of an item's value. However various irrational forces can and do influence a buyer's behavior.
AIG's job was to value these instruments in a rational way and insure them. IOWs, they were supposed to scrutinize that mark to market value. Any real, rational measure of valuation must include an accurate risk measure which reduces an instrument's valuation from an irrational sales price. Risk reduction then includes considerations of irrational causes that gave rise to the selling price. The real valuation, being rational, would stand up as such in reality. That wasn't the case here. AIG's certified wizards failed big time.
I expect no one in particular to do better. That includes the maggots infesting academia and the govm't. There's a moral component in addition to general competence involved here which are notably absent in socialists and various others. The free market hasn't failed here. It wasn't allowed to work at all. The thoughts, decisions and actions of the bozos that were in charge caused a catastrophic failure and they're being given more money and another go at playing sim-economy. That's ridiculous!