Ever heard of Mark to Market? Here is a little primer on what it is. It is an accounting term and it has played a big role in this current mess.
Assume you own a house, you bought it in 2004 at 600k. In 2006 a comparable house down the street sold for 750k. Today it would probably sell for 450k. You took a loan for 550k, question: ARE YOU BANKRUPT?
1/ no, since you don't want to sell now and you can wait for the market to come back
2/ yes, since on a mark to market basis, you are under-water.
Tough to decide right?
This is pretty much what is going on with the banks. They are holding onto long term highly illiquid assets (called Level 3 assets) and those assets nose-dived and there is no market for them. The balance sheets of the banks are highly impaired on a MTM basis. But many people point out that MTM is used because it is the only way we know to price things in a fair and transparent way, but that in extreme market breakdowns these numbers are temporary and should not force institutions into insolvency by the very definition of holding onto L3 assets that will vary in price over time. If an L3 asset hits a bottom price it should not trigger bankruptcy.
So congress just made sure we suspend MTM, you can now carry the assets at model or historical cost. In other words, we are in a breakdown mode and the rules are being suspended. Short term it means the earnings of the banks will be bullshit, marked to what management thinks it is worth. Just like you think of your assets with what your house "should be worth".