A Historical Examination of the Mark to Market Accounting Rule

Abstract

Since the financial crisis began in the fall of 2008, government officials, business leaders, accounting professionals and academics have debated the appropriateness of the “Mark to Market” accounting rule that financial institutions in the United States must use to value their financial assets. Critics have argued these accounting rules and regulations have helped cause the rapid failure of some of the world’s largest financial institutions. Proponents of the regulations argue that they are essential for accurate reporting of financial assets.

What has been missing from the debate is historical context. The practice of mark to market as an accounting device first developed among traders on futures exchanges at the beginning of the 20^th century. Over many decades the rule evolved as it was refined and used to value new and more complex financial assets. For example in the 1980s the practice spread to big banks and corporations, far from the traditional exchange trading pits. Beginning in the 1990s, mark-to-market accounting began to give rise to scandals (specifically, the Savings and Loan crisis and the Enron scandal).

In addition, over many decades the rule became increasingly politicized as various financial institutions lobbied the United States Congress for changes to the rule. In this paper I will discuss the history of the mark to market rule, and I will explore parallels between the current “Mark to Market” political/financial debates and similar debates that have occurred in prior decades.