Did Mark-to-Market Create a Phony Banking Crisis?

Jeffrey Snider at Atlantic Capital Management emails me this great analysis of the problems with mark-to-market accounting:

1) For the majority of the public banks are full of "toxic" assets. The reason they believe that is because of mark-to-market (or more accurately mark-to-model). The paper losses being forced on the banking system proves to the public the banks' toxicity.

2) Despite the fact that it may be difficult to explain that credit spread-based pricing models are producing insane results, the fact that 100% implied correlations or 80% default rates with 40% recovery rates are not realistic makes the effort worthwhile.

3) The banking crisis may not be the fault of the accounting rules, but it has been overstated by them. Consider that Citigroup has written down $30 billion in ABS CDO's, the super senior tranches, but none of those will ever see a single dollar loss. S&P estimates that AAA-rated tranches will only see 1% losses over their life (since super seniors have AAA-rated subordinated senior tranches offering credit protection there is no chance the losses will wipe them out and get to the super senior) echoing a report by the Bank of England from April 2008.

4) If you stopped someone on the street and told them Citigroup's "toxic" assets are really worth full value they would think you crazy because they heard about the mark-to-market losses. That is the true problem, the misunderstanding about what a paper loss and a real loss actually is.