MTM is designed to give an accurate picture of the valuation of assets that trade freely, not assets that trade perhaps once a year or so.
The solution to firms' keeping (and misvaluing) shoddy assets on the books is to apply a valuation standard that is appropriate to the industry. Most of the S&L debacle of the 1980s was fueled by simple corruption: a parcel of land worth, say, $20,000, was revalued arbitrarily, with a wink and a nudge, to $200,000, and the new (cough) 'valuation' was pushed into the fractional banking pipeline, with the obvious result.
Nor can ''keeping the books stuffed with cash and cash-equivalents'' really solve this problem in many industries. Numerous industries -- building, for example -- perforce deal in physical non-cash assets. Yet there must be, for these industries as for any other, mine included, some valuation method that reflects the real world.
In these cases, mark-to-market isn't it, at all. Many times, for many different physical assets, there is no immediate market, no bidder(s), and the mark -- if one goes literally, as the goobermint regulators do when it takes their fancy -- is zero.
Which is complete rubbish, certainly, but that's what we've come to.
Given a choice as a prospective lender or investor, would you prefer to lend or invest in a company whose value was calculated according to mark to market rules, or according to some more relaxed and opaque standard that produced an unreliable valuation? With a prudent regard for your money, you would tend to prefer mark to market valuations as being more reliable in a pinch.
Or, if you own a company that is conservatively managed and uses mark to market rules, you would justly feel penalized by seeing competitors getting credit and investment based on dodgy accounting. Worse, when credit contracts, you would tend to get punished along with the high flyers with less reliable books because the accounting rules do not make relevant distinctions in asset values.
Capital markets and sound accounting rules can be cruel, but it is to the good purpose of denying credit and investment to firms that are too risky to deserve it. Ultimately, loss of access to credit is what pushes many failing firms into bankruptcy. The result is that bad contracts, investments, and loans are written off and assets are reallocated to other companies that can employ them to better effect.
Consider the result if firms were required to report mark to market valuations as well as some more relaxed standard. The marketplace would inevitably look to mark to market numbers as being the sounder method of valuation. In effect, the argument against mark to market is an argument against more reliable accounting so that painful truths are not told.