Suppose I offered you $10,000 worth of stock in AIG as collateral for a $10,000 loan. When the value of that collateral goes down, it's fair for you to call the loan, even if AIG is still making money and distributing dividends.
These is the way that a bank treats its own customers who put up property as collateral, but when banks themselves are putting up collateral, they want to operate under different rules.
The value of bank and insurance company assets are always an issue.
> Suppose I offered you $10,000 worth of stock in AIG as collateral for a $10,000 loan.
That's a different situation because (as I understand it), the "collateral" was performing loan portfolios.
I agree that the market price for those porfolios is relevant but does it really make sense to immediately declare an institution insolvent and all that implies when buyers take a holiday?
There was some stock involved in many of these cases, but it was the stock of Fannie Mae and Freddie Mac. The US govt gave tax and other preferences to regulated institutions that held Fannie and Freddie stock as assets. This pretty much guaranteed that a lot of them would take a huge hit when Fannie and Freddie went down.
The individuals who create contracts which involve mark-to-market values might not care about these contract's potential to set off systemic collapse. The state or the regulators or "the people" jolly-well ought to care.
Mark-to-market is attractive, but does it necessarily make sense? Suppose that I have an apartment building that is throwing off enough cash to meet my obligations. Is it worth nothing on a day when no one offers to buy it? Is it worth nothing on a day when no one offers to buy "comparables"?