February 10, 2009
Medill News Service
Rich Berg discusses the web site Performance Trust launched to educate people on the mark-to-market issues affecting financial institutions. “Many people do not realize that the mark-to-market rules are having a disastrous effect in today’s distressed market because they are discouraging banks from taking on significant amounts of new lending, which is vital to economic recovery," Berg said. “My fear is we will kill all the banks and then figure we should have made a change," he said. He likened the issue to a home loan where the appraised value of a home falls below the loan value and the homeowner is left to come up with the cash or face foreclosure. “Lenders don’t want to be forced to come up with cash if the value of the loan or asset declines below cost," Berg said. He added that such rules make sense for investment banks, but for commercial banks it destroys capital and the bank’s ability to lend. A better solution, Berg said, would be to allow banks to take impairments in the amount they expect to lose on an asset but not the entire asset.