Abstract
The aim of this paper is to analyze the pros and cons of the financial accounting standards rule, known also as Mark-to-Market Rule. Enacted November 15, 2007, required that all companies to be evaluated on the basis of prices reflecting actual market situation. We have shown this pro-cyclical rule significantly worsened the U.S. Financial Crisis of 2007. The article includes a discussion of reasons why US authorities adopted this rule for already third time in history, whereas the two preceding cases are also discussed. The US government did implement the discussed rule just on the eve of the recession or the financial crisis to relatively ease the rule during the period when the US economy was due for a rebound. Based on our analysis of the definition and strong pro-cyclical effects of MTM rule we have shown that just in the aftermath of factual easing of this rule the economy and equity markets sharply rebounded (other reasons for the last rebound of March 2009 have been discussed too). Timeline of important dates and developments during the US banking crisis of 2007 has been presented and so we hope such a rule will never be adopted again, especially not ahead or just after the start of a financial crisis in any country as it happened in 2007.
Highlights
The development of economy largely depends on the stability of financial market structures, the stability of financial system must be the most pursued objective of state authorities as otherwise the economy won’t be able to naturally recover from a financial crisis.One may raise a logical objection that financial crises can possibly have positive influence on any economy as it can filter all the negative and destructing activities of various people or financial structures
On the other hand any financial crisis gives rise to enormous decline in the economy and the first thing that comes to one’s mind is why to go through this massive crisis if a standard recession might well perform all the above mentioned functions just as well? In 2007, when the world economy was going through the most significant boom in its globalized history, news regarding the architecture of various securities started to emerge
The easing of the rule restored the market values of securities, which meant that the Financials could report significant gains on them in 2009 which was certainly not the case with 2008 when the MTM rule was deeply affecting the value of securities
Summary
One may raise a logical objection that financial crises can possibly have positive influence on any economy as it can filter all the negative and destructing activities of various people or financial structures. In 2007, when the world economy was going through the most significant boom in its globalized history, news regarding the architecture of various securities started to emerge. The initiators of this news were obviously the financial staff on Wall Street creating derivative products, which no one was able to decompile and see the real price making them unable to be evaluated
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