A special “The More You Know edition by request…

There are basically two ways to decide what something is worth.

Mark-to-market: it’s worth whatever someone is willing to pay for it presently.

Mark-to-model: it’s worth whatever a model you’ve created tells you it is worth. Ideally, this model will take into account the realizable cash flows from the asset and reasonable provisions for future losses.

Okay, I guess there’s a third way, and that way is when LoLo and I look at something that is 70% off at Saks and declare it to be a screaming deal even if it still costs more than most people’s car payments, but we’ll disregard that for the moment.

Of the former two ways, both are fraught with pitfalls. In mark-to-market, the system falls apart if there are few or no buyers, like today when it comes to asset-backed commercial garbage. In mark-to-model, it falls apart if the person creating the model is a liar-liar-pants-on-fire (Enron), or otherwise fails to make the aforementioned reasonable provisions for future losses (insert something about Black Swans here).

You can read all about FAS 157, “Fair Value Measurements,” at the FASB’s website, which is probably about as fun as being interrogated by the FSB, if you want more details (though I would say FASB is considerably less likely to cut off any of your fingers). The important thing to know is, it’s being thrown under the bus right now. Mark-to-market accounting is being vilified at the moment precisely for how it makes all our favorite acronyms effectively worthless. There are almost no buyers for ABCP/MBS/CDO/OMGWTFBBQ – only short sellers.

It’s fun to say these assets are “worthless” – we do it all the time around here. Assuredly, some of them are. Some of them may not be. But nobody really wants to buy them and wait around and find out.

Additionally, the alternative to marking them to market is to trust the estimate of “net realizable value” as created by the same banksters who have gotten us into this mess:

A hint of the true situation was contained in a remark by Vikram Pandit, the CEO of Citibank, in testimony before the House Financial Services Committee last week. He noted that Citi marks to market and that “those marks are reflected in the losses we’ve taken, as well as in our income statements and balance sheets.” But Mr. Pandit then went on to point out that the bank has a duty to shareholders: “And the duty is if it turns out [the assets] are marked so far below what our lifetime expected credit losses are”–i.e., their net realizable value–”I can’t sell [them].”

In other words, Citi has marked some assets below their net realizable value, and selling them at a price lower than that value would be unfair to its shareholders. This opens a key route to a solution for the government–buying the assets at the value that banks like Citi would be willing to sell them.

What the banks think these assets are worth > what the market thinks they are worth right now. No surprise there.

I should have named this blog Scylla and Charybdis because that’s how I feel about the financial situation most of the time. Nationalize, or pour money down a black hole? Mark everyone’s assets zero or trust these basically untrustworthy guys to tell me what fair value is? Congress is supposed to hold hearings on MTM this week, so get some popcorn. If it’s suspended, expect a huge pop in the bank stocks as their balance sheets inflate and short-sellers run to cover.

And for funzies — thestreet.com vid speculates Geithner won’t be around long: