The great mis-marking mishap
Euromoney Limited, Registered in England & Wales, Company number 15236090
4 Bouverie Street, London, EC4Y 8AX
Copyright © Euromoney Limited 2024
Accessibility | Terms of Use | Privacy Policy | Modern Slavery Statement
Opinion

The great mis-marking mishap

Marking everything that is complex down to zero, because markets are illiquid, does not seem to be a particularly equitable or sensible way of going about things. And that’s before you even consider the way the marking malaise is contributing to systemic risk.

One of the feats of modern finance has been to turn hard assets, such as real estate, into financial ones. This would have been impossible without the use of complex modelling. However, the whole concept is now under pressure, and not just because of the mistakes made in securitizing mortgage loan pools and resecuritizing residential mortgage-backed securities into collateralized debt obligations.

Part of the beauty of this system was that because these securities were afforded high credit ratings, they were tradable and therefore relatively liquid. But the models and ratings were wrong, liquidity has disappeared and prices on assets that were once easily marked are now opaque.

This is now contributing to problems in marking credit books. Investment banks should provide regular marks on the risks they have on their balance sheets. But how can this be done in a way that does not do an injustice to shareholders?

Marking everything that is complex down to zero, because markets are illiquid, does not seem to be a particularly equitable or sensible way of going about things. And that’s before you even consider the way the marking malaise is contributing to systemic risk.

Gift this article