For example, suppose an institution would only buy bonds from another institute at 20% below, now there is a 20% lower transaction, and once that takes place you have mark to market, then every institution that has similar assets has to mark down the prices. Think of all the bonds related to the housing sector in the U.S., banks have stopped trading them, and the very few taking place are extremely low because the only people selling are those trying to get anything for them, and when that happens, and everyone marks to market to reflect those true assets the value plunges. This leads to a deterioration of the balance sheet.

Why is mark to market currently a problem?
[There’s] a problem using mark to market when the market doesn’t work. It’s a great idea if there are a lot of transactions. When the [ market] stops working and there are very few transactions the prices do not reflect market prices but the specific needs of the few buyer and the sellers. There in the nutshell is what’s going on. The markets dried up and few and fewer people are buying and selling, the remaining sells are even more depressed prices and the only people that would buy are the people offering next to nothing. Right now, there are no prices out there to compare against. They have nothing to benchmark it against to reflect market based prices.