Your proposed explanation is a very incomplete version of what was actually going on.

It depends on what the purpose of the assets was on a company's books. In some cases marking to market makes sense and in others it doesn't.

In the case of assets used as reserves (companies are allowed to use securities as reserves for underwriting risk) marking to market means that when the underlying commodity has a bubble, the firm suddenly has significantly greater ability to take risk... then if the asset price falls the firm is suddenly way over-extended.

If a firm is responsibly underwriting its own risks, the firm's accountants will determine which assets are suitable and which are not. However in a heavily regulated, heavily subsidized financial system like the US, firms have an incentive to take the maximum risk allowed by law, with the expectation of below market rate loans or other bailout assistance if the practice turned out (in hindsight) to be too risky.

In the post financial modernization act boom, firms found ways to treat all kinds of risky assets into reserves, and regulators believed that it was nearly impossible that housing prices would fall more than a few percent. The cabal of large firms and regulators squeezed additional returns out of various schemes for a few years, while shoving significant systemic risk (all built upon the assumption that housing prices would not fall significantly) into the corners and tranches of all sorts of complex products.

I'd argue that any complex financial system will ultimately result in coordination to ignore inconvenient systemic risk.

> If a firm is responsibly underwriting its own risks, the firm's accountants will determine which assets are suitable and which are not. However in a heavily regulated, heavily subsidized financial system like the US, firms have an incentive to take the maximum risk allowed by law, with the expectation of below market rate loans or other bailout assistance if the practice turned out (in hindsight) to be too risky.

And yet there were systemic failures before the financial industry was heavily regulated (that's why there is regulation in fact!). It turns out people are greedy and left alone or regulated will still make risky decisions to try and squeeze out more money.

The pre-regulation environment was not a modern information economy like ours is today. In today's world, financial regulation is created at the behest of industry to create the appearance of responsible management.

Much like a seatbelt made of paper, financial regulations are for appearances only, as the recent massive crisis should illustrate profoundly.

Financial firms are the top donors to both political parties and are the recipients of unprecedented handouts. The idea that we have any sort of meaningful financial regulation at all is absurd.

The best evidence of this is how people nitpick about a tangential but easily sound-bitable thing like marking to market or the SEC jumping on Groupon after there's already blood in the water. They bear no impact on the quality and scope of governmental oversight over the financial system, yet the public is supposed to believe that tales like these are evidence that oversight is occurring.

The most charitable argument in favor of the SEC is that it's understaffed/underfunded and must focus on high profile enforcement actions. In reality, it's a sham agency whose role is to fool the public into thinking that the financial services industry is regulated in a way beneficial to the public.

Even today, the core problems that actually caused the recent crisis have not been addressed. These are the government programs that artificially elevate housing prices and the conflicts of interest had by ratings agencies who depend on the business of those whose products they are intended to rate.

It's important to realize that we live in an economy where 50% of capital is allocated by the government and where the private/public partnership of the financial industry and regulators has an extremely large impact on day to day life.