Comment by lordnacho
6 months ago
It always bothered me that certain things are not marked to market. It's pretty much the point of financializing the economy, that you can then get a current value for things, instead of being able to pretend everything is fine.
The problem is that if you don't update values continuously, you are surprised when you finally are forced to. Some stock on the public market that isn't doing well goes from 100 to 90, 80, 70... etc, and people thinking about the stock have to make decisions accordingly.
A private loan against that business can sit at 100 until the company decides it can't pay, and suddenly the loan is worth 20.
Mark-to-market can create liquidity crises when coupled with capitalization requirements, though. This can happen in, e.g., bond markets.
Say a bank is sitting on a pile of very safe bonds. If the interest rate suddenly increases, the mark-to-market value of the bonds goes way down. The bank would still expect to get the full value of all the bonds at maturity. But if the bank has to mark-to-market, the current value may be low enough that capitalization requirements force the bank to sell all the bonds in a fire sale. So even though the bank in theory could have held onto the assets and gotten exactly what it had expected from the start, it instead ends up taking a big loss.
I think that's almost what happened to Silicon Valley Bank, except that they weren't required to recapitalize, but all of their customers read their financial disclosures, assumed a mark-to-market loss was an actual loss, and withdrew their money, running the bank.