If you have been following the financial news for the past few months, you may still be scratching your head over what factors have either fueled the current financial meltdown, or actually precipitated it in the first place. One piece of the puzzle will surely be identified; Rule 157 of the U.S. Financial Accounting Standards Board’s regulations (FASB 157).

Under FASB Rule 157, commercial banks are required to value their balance sheet securities and loans according to “Mark to Market” rules. FASB 157 took effect with fiscal years that began after Nov. 15, 2007. However, in a downward spiraling market as the real estate market has been experiencing, coupled with a sharp plummet in the volume of U.S. commercial mortgage-backed securities (CMBS) issued in the 3^rd quarter of 2008, (from nearly $60 billion in the same quarter of 2007, now at $0 (yes, “zero”) in the 3^rd quarter of 2008, there is no market value to report on the balance sheet. This forced “paper losses” of billions of dollars for financial institutions such as AIG, even though they were truly unrealized losses at the time.

In an interesting article in Forbes, “Suspend Mark-To-Market Now!”, the author points out “"It is true that the root of this crisis is bad mortgage loans, but probably 70% of the real crisis that we face today is caused by mark-to-market accounting in an illiquid market.”.