March 11 (Bloomberg) -- Plenty of folks believe Elvis is still alive, wolfing down burgers at a Dairy Queen somewhere. They are probably the same people who believe mark-to-market accounting is at the root of the financial crisis.

It isn’t. Forget the drum pounding, which keeps growing louder, about how banks are forced by irrational markets to mark down the value of all their assets.

Figures provided by banks themselves in their 2008 filings show otherwise.

Of the $8.46 trillion in assets held by the 12 largest banks in the KBW Bank Index, only 29 percent is marked to market prices, according to my analysis of company data. General Electric Co., meanwhile, said last week that just 2 percent of assets were marked to market at its General Electric Capital Corp. subsidiary, which is similar in size to the sixth-biggest U.S. bank.

What are all those other assets that aren’t marked to market prices? Mostly loans -- to homeowners, businesses and consumers.

Loans are held at their original cost, minus a reserve that banks create for potential future losses. Their value doesn’t fall in lockstep with drops in market prices.

Yet these loans still produce losses, thanks to the housing meltdown and recession. In fact, bank losses on unmarked loans are typically bigger than mark-to-market losses on securities like bonds backed by mortgages.

More Distrustful

Altering mark-to-market rules wouldn’t staunch that flow of red ink. Worse, it would make investors even more distrustful of bank balance sheets.

These investors already believe banks are underestimating just how bad losses will be on their unmarked loans. GE investors, for example, fled the stock due to concerns over its corporate loans and lending to Eastern Europe.

If investors could get a better sense of the losses actually facing GE, they might have more confidence in its financial strength. In other words, we need more mark-to-market accounting, not less.

So it’s hard to swallow the notion that markets have been hobbled because of mark-to-market accounting. Or that markets would miraculously recover if we eliminated these rules and relied instead on bankers’ judgment of what assets will ultimately be worth.

Still, that is likely to be one refrain during a House Financial Services subcommittee hearing scheduled for tomorrow on mark-to-market accounting. There is a push in Congress to resurrect legislation to suspend or abolish mark-to-market accounting. On television talk shows and in opinion pieces, pundits such as publisher and former presidential candidate Steve Forbes are also calling for the death of mark-to-market accounting.

Holding Firm

So far, policy makers have stayed sane. Speaking yesterday at the Council on Foreign Relations, Federal Reserve Chairman Ben Bernanke reiterated his support for the principle of marking to market. In December, after an extensive study, the Securities and Exchange Commission recommended against suspending or eliminating mark-to-market accounting.

So why is mark-to-market such an issue? It is being used as a scapegoat by banks and others to dodge two big issues -- their reckless use of borrowed money to boost returns and their inability to make sound loans and investments.

Plus, the basics of marking-to-market often get confused. Consider the refrain that banks can’t mark assets to market prices because markets are frozen. Of the 12 banks in the KBW that I reviewed, only 5 percent of total assets on average were designated as being hard to value because market-based prices weren’t available.

Mark-to-Myth

These so-called mark-to-myth assets represented 58 percent on average of total shareholders’ equity among the banks. They fall, though, to just 16 percent of equity if the Big Four banks -- Bank of America Corp., Citigroup Inc., JPMorgan Chase & Co. and Wells Fargo & Co. -- are excluded.

Unlike most commercial banks, the Big Four have a higher percentage of tough-to-value assets due to their investment- banking activities. In many cases, losses that stemmed from those holdings reflect banks’ decision to enter risky transactions or markets. In that case, mark-to-market simply recognizes the reality of those missteps.

Indeed, the bigger banks tend to have more mark-to-market assets than smaller peers. At M&T Bank Corp., for example, 73 percent of total assets were unmarked loans. Only 12 percent of its $65.8 billion in assets were marked to market prices.

For banks then, mark-to-market shouldn’t be a big issue. For investors it’s another story.

Such a big pool of unmarked assets makes investors nervous about banks’ books. The lack of marking also flies in the face of a bank’s business model, which relies on borrowed money, often provided for short periods of time, to lend longer term.

New Money

This makes banks very different than, say, a homeowner who borrows a lot of money. In most cases, the homeowner has locked in funding. So long as the homeowner makes payments and doesn’t need to refinance, market prices aren’t that important.

Banks must tap debt markets for new money all the time. Investors buying that debt want to know how much the bank’s assets are worth. That tells them how much of an equity cushion the bank has to absorb losses.

For those investors, the current value of an asset, not what management thinks it will be worth, is vital. After all, their biggest concern is getting paid back in the event of default.

If they can’t gauge that likelihood, they stop lending. Banks then can’t finance themselves. That is a big cause of the credit crunch.

Giving those investors a better sense of the true losses facing banks, not tampering with mark-to-market accounting, is the way to help the financial system heal.

(David Reilly is a Bloomberg News columnist. The opinions expressed are his own.)

To contact the writer of this column: David Reilly at dreilly14@bloomberg.net

Last Updated: March 11, 2009 00:01 EDT