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480 Dissenting Statement

market meant that PMBS simply could not be sold at anything but distress prices.
Th e inability of fi nancial institutions to liquidate their PMBS assets at anything like
earlier values had dire consequences, especially under mark-to-market accounting
rules, and was the crux of the crisis. In eff ect, a whole class of assets—involving
almost $2 trillion—came to be called “toxic assets” in the media, and had to be
written down substantially on the balance sheets of fi nancial institutions around
the world. Although this made fi nancial institutions look weaker than they actually
were, the PMBS they held, despite being unmarketable at that point, were in many
cases still fl owing cash at close to expected rates. Instead of a slow decline in value—
which would have occurred if whole mortgages were held on bank balance sheets
and gradually deteriorated in quality—the loss of marketability of these securities
caused a crash in value.
Th e Commission majority did not discuss the signifi cance of mark-to-
market accounting in its report. Th is was a serious lapse, given the views of many
that accounting policies played an important role in the fi nancial crisis. Many
commentators have argued that the resulting impairment charges to balance sheets
reduced the GAAP equity of fi nancial institutions and, therefore, their capital
positions, making them appear fi nancially weaker than they actually were if viewed
on the basis of the cash fl ows they were receiving. 53
Th e investor panic that began when unanticipated and unprecedented losses
started to appear among NTMs generally and in the PMBS mortgage pools now
spread to fi nancial institutions themselves; investors were no longer sure which of
these institutions could survive severe mortgage-related losses. Th is process was
succinctly described in an analysis of fair value or mark-to-market accounting in
the fi nancial crisis issued by the Institute of International Finance, an organization
of the world’s largest banks and fi nancial fi rms:
[O]ft en-dramatic write-downs of sound assets required under the current
implementation of fair-value accounting adversely aff ect market sentiment, in turn
leading to further write-downs, margin calls and capital impacts in a downward spiral
that may lead to large-scale fi re-sales of assets, and destabilizing, pro-cyclical feedback
eff ects Th ese damaging feedback eff ects worsen liquidity problems and contribute
54
to the conversion of liquidity problems into solvency problems. [emphasis in the
original]
At least one study attempted to assess the eff ect of this on fi nancial institutions
overall. In January 2009, Nouriel Roubini and Elisa Parisi-Capone estimated the
mark-to-market losses on MBS backed by both prime loans and NTMs. Th eir
estimate was slightly over $1 trillion, of which U.S. banks and investment banks
were estimated to have lost $318 billion on a mark-to-market basis. 55
Th is would be a dramatic loss if all of it were realized. In 2008, the U.S.
banking system had total assets of $10 trillion; the fi ve largest investment banks had

53 FCIC Draft Staff Report, “Th e Role of Accounting During the Financial Crisis,” p.16.
54 Institute of International Finance, “IIF Board of Directors - Discussion Memorandum
on Valuation in Illiquid Markets,” April 7, 2008, p.1.
55 Nouriel Roubini and Elisa Parisi-Carbone, “Total $3.6 Trillion Projected Loan and Securities Losses in
U.S. $1.8 Trillion of Which Borneby U.S. Banks/Brokers,” RGE Monitor, January 2009, p.8.