Is it Sarbanes-Oxley's Fault?

Yesterday, I overheard some colleagues talking about the current financial meltdown, and they were saying that part of the blame rests squarely at the feet of the Sarbanes-Oxley Act, and specifically for its requirement that firms use mark-to-market accounting. I will be trying to learn more about this over the next week or so, as while I've heard a little rumbling about mark-to-market, I've not heard nearly the rumbling as I have towards CRA, Greenspan, Fannie Mae/Freddie Mac, and predatory lending among mortgage lenders. How exactly, though, would mark-to-market accounting cause a financial crisis like this? Here's what one commenter says.

Also of immediate urgency is for regulators to suspend any mark-to-market rules for long-term assets. Short-term assets should not be given arbitrary values unless there are actual losses. The mark-to-market mania of regulators and accountants is utterly destructive. It is like fighting a fire with gasoline.

Think of the mark-to-market madness this way: You buy a house for $350,000 and take out a $250,000 30-year fixed-rate mortgage. Your income is more than adequate to make the monthly payments. But under mark-to-market rules the bank could call up and say that if your house had to be sold immediately, it would fetch maybe $200,000 in such a distressed sale. The bank would then tell you that you owe $250,000 on a house worth only $200,000 and to please fork over the $50,000 immediately or else lose the house.

Absurd? Obviously. But that's what, in effect, is happening today. Thus institutions with long-term assets are having to drastically reprice them downward. And so the crisis feeds on itself.

The WSJ also reports on the growing opposition to the rule in light of these problems.

Update: Mark Thoma has a lengthy post about it here with links to others. This is definitely something that I hope will get hashed out thoroughly.