Yesterday, I posted my support for requiring firms to use "mark to market" for valuing assets. There were several excellent comments then. In addition, I received a private e-mail from BQ, who works in areas related to the investment banking industry:
One thing that is frequently overlooked in talking about mark to market is that massive collusion exists in the finance industry. Everyone knows everyone and there are only so many banks that act as market makers on a given security and this number is decreasing daily. The reason to note this is because marking to market is very open to manipulation by the market makers.
He then provided an example of market manipulation which would almost surely be actionable.
This type of behaviour would be very easy to apply to all toxic assets. There are many other ways that collusion could work to make things very pliable for the banks.
The flawed models may still provide a better measure of an asset's value.
But I'm not convinced. See this.