On its surface, market-to-market or "fair value" accounting makes some superficial sense. Markets usually provide transparent and verifiable prices, so companies can't just contrive numbers to make their earnings look good.
The problem with mark-to-market is its failure to recognize that market prices for securities often deviate--sometimes substantially, but always ultimately temporarily--from the underlying fundamental value of the assets. Since markets are forward looking, mark-to-market forces financial firms to take hits to capital over something that "might" happen in the future, but has not happened yet. It's like forcing homeowners to come up with more capital when the weather man forecasts a hurricane because their homes might be destroyed.† More on what accountants want, here.