Mark-to-Market : Public Interest causes Market Failure?

From Congressional testimony excerpted in the NYT:

AIG says the rules forcing information into the market regarding debts caused their downfall:

In his testimony, Mr. Willumstad attributed the company’s failure largely to mark-to-market accounting rules that forced A.I.G. to recognize tens of billions of dollars in accounting losses, as well as a “tsunami” of market instability ignited by the collapse in value of mortgage-backed securities.

Congressman Waxman thinks otherwise:

“A.I.G. is blaming its downfall on accounting rules which require it to disclose losses to its investors,” the specialist, Lynn E. Turner, the former chief accountant at the Securities and Exchange Commission, said. “That’s like blaming the thermometer, folks, for a fever.”

So, basic econ theory says there is an assumption of perfect information which supports an efficient marketplace.  But, AIG (and others) say a rule forcing disclosure of “more” information than the company ordinarily would have disclosed — caused the market to devalue their company.

This argument causes one to question whether the markets were overvalued because of inefficiencies due to imperfect information.

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Filed under Market Failure, Policy

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