The theory behind marking to market is so simple and so common-sensical that you might wonder what the fuss is about. It says that, at any given point in time, the assets on one's books have to be valued at then-current fair market value. So, if you have a house, you value the house at what you could sell it for at the moment you're asked, "What's it worth". Seems simple, right?
One problem, however, is that marking to market can be abused in a situation where you have an asset that has no obvious "market value", because there is no day-to-day market, or because the asset is complex enough to have no intrinsic, obvious value. Enron used this to their advantage and used a "mark to model" standard that of course could be manipulated by manipluating the model.
Out of that scandal came a set of rules defining "fair value". This defines a hierarchy of markets and market-like data sources that were to be used in assessing mark-to-market value.
This leads us to our other problem: if an asset becomes "toxic", like mortgage-backed securities have become, there ceases to be a market at all. Under the "fair value" rules, if there is no market at all, then the assets essentially have no value at all, even though that's not strictly true. Even with housing values having crashed, one could foreclose a house, fulfill at least part of the mortgage with the foreclosure proceeds, and thus provide value to the securities. But since nobody right now wants to buy them, they're considered valueless.
And so, many economists are now arguing that the entire crisis basically comes down to a mistake in accounting rules, and that simply changing the rule might eliminate the crisis without spending an additional penny of taxpayer money.
So, as I said, the Senate version of the rescue bill will apparently include a provision that will allow the SEC to wave a magic wand and waive the "fair value" rule on a selective basis. It will also direct the SEC and other agencies to conduct a thorough study of both "mark to market" and "fair value" rules.