First, I don't claim to be a world-class expert on the intricacies of bank balance sheets, collateralized mortgage obligations (CMOs), and the like. But the debate regarding the "mark-to-market" (MTM) of bank and investment company assets is a fairly familiar subject to me, as I am experienced with derivatives, leverage and risk. As a former CBOE Market Maker, I had open options positions with a stock hedge, which were at times gigantic and involved hundreds of strikes on a single equity, that had to be priced every single trading night. The pricing of these options is called mark-to-market. Basically the clearing firm would price every option, usually using a bid/ask average or a theoretical price, depending on its liquidity. This would then be compiled into a risk profile/risk matrix on that particular equity's options. Currently, we "mark-to-market" our client trade recommendations every trading night, using auto-broker fill prices and bid/ask averages. A Bid/Ask average is often better to use for options than Last Trade, because some options may not trade very often if at all during a given day. For stock positions, the Last Trade is an easy logical way to mark-to-market, which is what brokerage houses use to value your positions.

So in general, I am in favor of "fairly" valuing an asset on a systematic, timely basis. However, in the current situation, what has happened is that certain financial companies have acquired large baskets of assets which apparently have very little liquidity and are difficult to price -- in addition to the fact that they have lost huge amounts of value. Apparently, a realistic MTM of these assets in the current market would cause balance sheets to basically turn insolvent for some companies. In the mean time, some of these assets may actually turn out to be drastically undervalued over the long term, if the mortgage/housing market stabilizes. But in the short-term, the pricing of them is causing problems for many companies that basically took on far too much risk/leverage.

So what makes sense to me is to allow some sort of temporary lifting of MTM regulations on certain assets held by banks and investment companies. I don't think this should be permanent -- in fact, we need to be adding more transparency, risk control, and regulatory rules in general because apparently many large firms virtually ignored their risk management departments (or more likely, the VPs of Risk Management were inclined to "play ostrich" and to look the other way due to the massive profits being brought in by certain departments). But if allowing these assets to priced on some sort of "positive curve" long-term theoretical valuation will help large financial institutions remain solvent, then a temporary changing of accounting rules would seem to be justified.

It's not as if gigantic corporations don't use financial shenanigans of all sorts anyway, running the gamut from extremely legal and ethical to basically shady and corrupt (see Enron for the latter). And by shenanigans I don't necessarily mean it as a negative connotation, more a colloquial expression -- could also be called "financial engineering". For example, remember when the venerable General Electric (GE) would exceed their quarterly earnings estimates by a penny or two, every single quarter like clockwork? In my view, that was basically due to complex massaging of financial engineering, probably contributed to by the GE Finance side). They could basically make the quarter come in at whatever number they needed to hit. GE is just an example. I certainly am not making any assertions as their credibility. The company is honest and forthright as far as I know. It's just that when things were going great for most companies and the stock market they had tactics and pools of money to utilize in order to meet (exceed) their numbers each quarter.

So bottom line to me, if letting some "loose" or "creative" MTM occur will allow some giant financial institutions to stabilize (thus helping stabilize the entire world economy), then bend the rules on a temporary basis.

Price Headley is the founder and chief analyst of BigTrends.com.