Mark-to-market 10-03-08
Posted by cthodges on October 3, 2008
Question about mark-to-market accounting
In response to the extensive and often confusing media coverage, many CAM investors have been inquiring about the relevance of “mark to market” valuations in today’s turbulent market place.
Mark-to-market is defined as the act of recording the price or value of a security, portfolio or account to reflect its current value rather than its book value. In terms of mutual funds, mark-to-market occurs when the Net Asset Value (NAV) of the fund is valued at the most current market value. A practical example is the purchase of 100 shares of stock at $10.00 each. The value of the purchase is $1,000.00. If the stock decreases to $5.00, the mark-to-market is $500.00. If the stock increased to $15.00, the mark-to-market would be $1500.00.
This same accounting principle is also applied to mortgages. If a real estate mortgage was initiated for the full purchase price of $100,000.00 in 2006, and it was accompanied by an appraisal for that amount, the market value of that mortgage was $100,000.00. Unfortunately with the recent decline in real estate values, that property may today be worth 6 cents on the dollar of the original purchase price. Even if that mortgage is being paid and is current, when the mark-to-market standard is applied to the mortgage, the new value of the mortgage would be $60,000.00 at best. These markdowns in mortgage valuations have devastated the balance sheets of lending institutions.
The debate before Congress is ongoing. Many Congressional leaders want to suspend mark-to-market accounting altogether. This would give lenders more leeway in valuing mortgage securities.
Accounting purists believe that changing traditional accounting procedures is misleading and encourages lenders to falsify their values. At a time when more regulation for lenders is a popular theme, giving lenders more discretionary power is a contrary position. At a time when more transparency in markets is needed, it is difficult to find support for this accounting change.
One of the biggest complaints about the large lending institutions is the lack of transparency. If mark-to-market accounting is altered that transparency might well be further compromised.
At CAM, our portfolio has increased by more than 150% since we opened the doors three years ago. We take great pride in our disciplined and transparent investment strategy.
Every day, CNBC asks a resounding question, “Do you know where your money is?” CAM customers always know where their money is. As one of the few registered investment firms that publicly generates profile growth on a weekly basis, CAM clients know their portfolio strength every minute of every day.
