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XMFSinchiruna (26.52)

Prepare to be lied to... The SEC says value your assets however you want!



October 02, 2008 – Comments (11)

This deals a significant blow to fairness and transparency in our financial system at the time when we need it more than any other time in our history!

This move by the SEC is a desperation move to prevent the systemic deleveraging of the $1.2 quadrillion market for over-the-counter derivatives. By allowing institutions to value their derivative "assets" according to their own internal assumptions... and ignoring the fact that they have no real value at all because there is no market for them whatsoever... the SEC is sanctioning lies. You are about to be lied to with the full and official blessing of the U.S. government.

We will see financial institutions suddenly touting fewer write-downs as a sign of their financial solvency, when in fact such claims will have no basis in reality. This action will not un-freeze the derivatives market, but will only prevent shareholders and taxpayers from seeing how bad it is. If there is one thing I can get through to my fellow Fools, I wish it would be that for every intervention of any kind... there are consequences. There is no lasting slight of hand in markets, because every golden parachute will eventually tear.

Oh, and by the way, the letter to the SEC that prompted this move was signed by a bipartisan group of 60 lawmakers. I suggest we find out who they were and call or fax them to ask why they asked the government to lie to you. Every day comes another outrage bigger than the last... it's exhausting. Let's keep the pressure on Congress... keep calling, faxing, etc. No more e-mails.. another news outlet just reported they've had to eliminate much of that e-mail traffic as the web servers were overwhelmed... so I'd hate for your efforts to go unseen. Call or fax, and then do it again. :) 

Here's the Reuters article:

By John Poirier and Emily Chasan

WASHINGTON (Reuters) - U.S. securities regulators on Tuesday gave the financial industry a reprieve from marking hard-to-value assets down to fire sale prices, throwing a lifeline to an industry beset by strained credit markets and the latest round of bank failures.

The U.S. stock market added to gains on the news, in hopes that regulators' new interpretation of fair value, or mark-to-market, accounting rules, will slow or reverse the heavy flow of mortgage-related losses on banks' balance sheets.

In the new guidance, first reported by Reuters, the U.S. Securities and Exchange Commission reminded financial services firms that they don't need to use fire sale prices when evaluating their hard to price assets.

"This is a significant first step and adds stability, confidence, and liquidity within the capital markets," said Steve Bartlett, president and chief executive of The Financial Services Roundtable. "By clarifying how to treat assets in an uncertain market, the SEC is continuing to provide transparency to investors and helping institutions to provide credit in periods of market stress."

U.S. accounting rule maker, the Financial Accounting Standards Board said on its Web site on Tuesday that it would change the agenda for its Wednesday meeting to focus on fair value accounting. The board is contemplating issuing additional guidance through a FASB staff position as soon as Wednesday, according to a person familiar with the matter.


The SEC's guidance on Tuesday, came on the last day of the third quarter for most U.S. companies, allowing them to incorporate the changes in their next round of financial statements.

In a document on the matter, the SEC reaffirmed that management's internal assumptions can be used to measure fair value when relevant market evidence does not exist.

U.S. accounting rule makers assume that the factors used to come up with fair values are based on an orderly transaction between willing market participants. The SEC document said that "distressed or forced liquidation sales are not orderly transactions."

"This guidance will help auditors more accurately price assets that are difficult to value under current market conditions," said Edward Yingling, president and chief executive of the American Bankers Association, whose group has been among several pressuring the SEC to clarify the rules for months.

Under U.S. accounting rules, assets can be valued based on a simple price quote in an active market. But the hardest to value assets are often based entirely on management's best estimate derived from mathematical models.

However, as credit markets seized up this year, many banks were forced to rely on models to value complex mortgage securities that used to trade in more active markets. Critics have complained that accountants forced banks to base their values on fire sale prices in illiquid markets instead of the so-called level 3 input, or unobservable factors, such as the mathematical models used to evaluate their securities.

The SEC's guidance says that sometimes the level 3 inputs may be more appropriate than the so-called level 2, or observable factors.

"In essence, the SEC wants to stop the avalanche of declining prices," said Tom Sowanick, chief investment officer at Clearbrook Financial. Sowanick said that the new guidance should allow banks to rely more on their own assumptions when they determine fair value rather than the distressed sale prices occurring in the markets.

But fair value accounting has been popular with many investors who said it greatly increased transparency about the risks banks are facing.

"This letter (SEC document) could be titled, pick a number, any number, as it gives bankers great leeway in choosing what numbers they will give to investors," said Lynn Turner, who served as chief accountant at the SEC from 1998 through 2001.

Others, however, said that the changes have not gone far enough.

In a letter to SEC Chairman Christopher Cox on Tuesday a bipartisan group of more than 60 U.S. lawmakers urged the SEC to suspend the fair value accounting rule immediately.

"Fair value accounting is a utopian dream that ran into the reality of business and litigation," said Chris Whalen, co-founder of Institutional Risk Analytics, which provides ratings and analytical tools to investors.

"Equating an opinion with a market price is crazy," he continued. "It doesn't matter who gives the opinion -- the auditor is still going to say to the client, 'Why don't you write it down?'"

Under U.S. accounting rules, a "Level 1" asset can be marked-to-market based on a simple price quote in an active market. However, the price of a "Level 2" asset is "mark-to-model" and is estimated based on observable market prices and inputs. A "Level 3" asset is so illiquid that its value is based entirely on management's best estimate derived from complex mathematical models.

(Reporting by John Poirier, Emily Chasan, and Rachelle Younglai with additional reporting by Jennifer Ablan; editing by Carol Bishopric)




11 Comments – Post Your Own

#1) On October 02, 2008 at 12:34 PM, devoish (63.65) wrote:

The bill to allow fair value accounting was intended as an option to a 700bil bailout. I believe it is from Congressman Defazio.

700bil bailout plan has Paulson's imagination selecting which banks survive and can sell their assets at whatever price Paulson decides will benefit the seller enough at taxpayer expense.

The bill from Congressman Defazio was offered as an alternative, allowing a bank to estimate the value of the MBS and try to find a buyer. Frankly, house prices are coming down. the plan we are getting allows taxpayers to take the losses. Defazio's bill would have left those losses with the bank. Not good, but not as bad.

The stock market is reacting badly more because of Paulson, Bush, Franks etc declaring the end of the world if we don't do something. Defazio's bill was something they could have pointed to, to calm the markets. Neither bill really changes anything and the only real solution is to take steps to stem the United States losses from high oil prices and reliance on imported goods. The 700bil impairs our ability to get out of debt further.

It has never been the goal of this administration to benefit the citizens of the United States. It has been their goal to keep us dependant on oil and in debt for as long as possible.

I am pretty sure Paulsons bill with him getting to decide what a security is worth is basically the same thing as letting a bank decide.

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#2) On October 02, 2008 at 12:46 PM, Tastylunch (28.52) wrote:

Sigh is it just me is all this nonsense making the next crisis worse?

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#3) On October 02, 2008 at 12:49 PM, devoish (63.65) wrote:

No Bailouts Act

Paulsons plan is the equivalent of jumping off the ten foot platform into the deep end of an empty pool.

Defazios plan is the equivalent of jumping off the deck into the shallow end.

Paulson is willing to jump us off the 35 foot platform. I would consider it very possible that Paulson and friends (outside and inside the USA) are intending to try and crash the markets and dollar for personal gain. I don't know, I hope not, but to hear them talk about financial disaster, I cannot imagine what else they have in mind. I am suspicious they are trying to scare investors as much as congress, and the 700bil is gravy if they can get it. I fear they are planning long term.

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#4) On October 02, 2008 at 12:51 PM, devoish (63.65) wrote:


We will be fine, if we can just get out of debt.

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#5) On October 02, 2008 at 1:37 PM, QualityPicks (79.49) wrote:

Prepare? We have been lied all along :)

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#6) On October 02, 2008 at 2:00 PM, dinodelaurentis (83.58) wrote:

will there be cake?

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#7) On October 02, 2008 at 2:35 PM, puccini3005 (30.08) wrote:

Isn't this the same kind of accounting the Enron empire of deception was built on?  Wasn't Anderson shredding this stuff as things began to crumble?  And aren't people serving jail time for "mark-to-market" lies?  That collapse was collosal, it wiped out alot of retirements and savings...  Apparently we learned nothing.

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#8) On October 02, 2008 at 4:00 PM, rd80 (94.59) wrote:

... and ignoring the fact that they have no real value at all because there is no market for them whatsoever..

So, in your opinion an asset that's producing an income stream should be valued at zero because there's no market for it?

Recommend going to the SEC website and reading the clarification statement rather than relying on Reuters.

The joint SEC/FASB clarification doesn't allow banks to just make it up.  They are still required to use market prices where there is a functioning market.  "A quoted market price in an active market for the identical asset is most representative of fair value and thus is required to be used (generally without adjustment)."

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#9) On October 03, 2008 at 10:31 AM, anchak (99.90) wrote:

The WFC-WB deal is being done by WFC on "Fair-Value" NOT Mark-to-Market!

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#10) On October 09, 2008 at 5:30 AM, Strnj1 (63.43) wrote:

"We're from the Government and we're here to help."

Happy Halloween

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#11) On October 21, 2008 at 1:19 PM, beirut (83.44) wrote:

Crazy persons theory-

crashing the market to soon propose a unified usa-canada-mexico with a new currency.

oh wait, already happening? yes.

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