The Securities and Exchange Commission and the U.S. accounting-standard setter issued guidance that will allow companies to use more flexibility when valuing securities in a market that has dried up, a move the banking industry hopes will relieve pressure on company balance sheets.
Tuesday, the SEC and Financial Accounting Standards Board issued "clarification" to accounting rules that require companies to value securities at the price for which they can be sold in the market, known as mark-to-market, or fair value, accounting. FASB said it is preparing additional guidance for later this week.
The clarifications allow executives to use their own financial models and judgment if no market exists or if assets are being sold only at fire-sale prices. They were welcomed by banking and financial-services groups that have lobbied the SEC and FASB to change the rules. Those efforts were ramped up in recent days as Congress was drafting a rescue bill.
Because of the credit crunch, the industry has said both the accounting treatment and how it is interpreted by auditors was too conservative and resulted in losses at financial institutions that were bigger than they should have been. They said the rules forced companies to write down assets tied to companies that had no chance of defaulting largely because there were few buyers or sellers.
The move Tuesday addressed many of their concerns. The SEC and FASB stopped short of bowing to pressure from some lawmakers and lobbyists who were seeking a complete suspension of fair-value accounting.
There is a reason these assets are valued at firesale prices: these are the only prices we can actually sell them at. That is where a "willing buyer and a willing seller -- neither being under a compulsion to sell -- would actually sell the stuff. There's a reason these assets are priced at those levels -- they're crap.
I love the model argument. "According to this model, this security is really worth x." Really? Then you buy it and put it in your personal account. I'm sure the bank would be willing to slice off a small piece for your IRA. Just let me know when you're ready.
It's amazing to me how all the "free market people" have utterly thrown their principles away during this crisis. Let's see the credibility go by the wayside.