Mark-To-Management

Mark-to-management is/was a practice of financial institutions of assigning valuations of their assets and liabilities based on what management wanted them to be. This method stands in contrast with mark-to-market and other standard ways to measure and report the value of assets and liabilities. Mark-to-management was most prevalent during the financial crisis of 2008, as panicked executives needed to show to the world that their worthless assets had some value and their liabilities were manageable. If they marked them to market (i.e., what the prices would be in the open market), the consequences to their banks, jobs and millions of dollars of bonuses would be disastrous. Thus, management marked them to suit their desperate needs.

The Financial Accounting Standards Board (FASB) sets generally accepted accounting principles (GAAP) for companies to prepare their financial statements that investors rely on. As the Wall Street machine continued to churn out more products in the late 1990s and early 2000s, the FASB felt a duty to lay down more guidelines for valuation of things coming out of Wall Street. After a customary proposal and review period, the FASB in 2007 implemented FAS 157 that established a three-level hierarchy of asset and liability valuation. Financial institutions - investment banks, commercial banks, insurance companies, private equity firms - began separating financial assets and liabilities into Level 1, Level 2 and Level 3 groupings. According to FAS 157 definitions, inputs to mark Level 1 items are quoted, unadjusted prices in active markets for identical assets or liabilities; inputs for Level 2 are "observable" prices, either directly or indirectly "through corroboration with observable market data"; and inputs for Level 3 are unobservable and "reflect the reporting entity's own assumptions about the assumptions market participants would use in pricing the asset or liability (including assumptions about risk) developed based on the best information available in the circumstances." The original intent of FAS 157 was to clarify the concept of "fair value" by focusing on an exit price instead of an entry price of an asset or liability - in other words, what would be received for a sold asset or what would be paid for a transferred liability.

Mark-to-management belongs in Level 3. Without quoted or observable prices to attach to financial assets and liabilities, management must use their discretion and "best" judgment to assign values. In orderly markets, Level 3 items can be marked without much controversy and scrutiny from investors - management may even be able to sneak in higher asset values and lower liability values without notice. However, during market stress there is the potential for management to play around with "fair value" numbers in Level 3. During the financial crisis period that climaxed in 2008, the survival instinct kicked in for frightened executives at major banks and other financial institutions, who marked assets and liabilities to what they needed to in order to keep their jobs. Some of these executives eventually were forced out, but not without suitcases of multi-million dollars in taxpayer-funded cash.