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.
8 comments:
Pardon my ignorance, but is there any good information out there on how mark to market and mark to model prices are determined, or is it just "the market says it's worth x" and "we say it's worth y"?
In response to the previous comment mark-to-market is considered GAAP (Generally Accepted Accounting Practices). These bonds and investments are considered short-term holdings and are marked as current assets on the balance sheet of every company. They are at the end of the Accounting Period revalued to market price. In essence you have the idea completely correct, the market is saying these things are worth X while the businesses model says they are worth Y. May big problem here is this is utterly stupid to be suspending a GAAP practice that I am being taught to follow as an Accounting Major. The other big problem is even if the Company says it is worth Y they will never be able to sell it at Y because the Market Price is X and no one will be willing to pay more the X for that investment.
How can anything even have a value until there is a market for it? If I have a painting I say is worth a million dollars, and I want to use it as collateral for a loan, who in their right mind would loan me the money without first establishing for themselves what the painting could actually be sold for in the event that I defaulted on the loan? Isn't the same principle at work here?
"How can anything even have a value until there is a market for it?"
Well, for example, if I have a non-transferable promise from Acme Inc. that they will pay me $1 per day in perpetuity. There's clearly no market for it since it's non-transferable, but the promise is still worth a pile of money. How much it's worth depends on how reliable Acme is.
Similarly, you could get a loan, not only from someone who thinks he can sell the painting on the market, but also from someone who'd be willing to pay the million for the painting him or herself. Private or restricted sales at non-market prices are common - for example, initial public offerings.
Moreover, markets will frequently set irrational prices for things. The familiar example for that is market bubbles. The notion of bubbles, and bubble collapse really only makes sense if there is some notion of value that is independent of the market price.
Bondad,
Can you explain to me why there is so much call on the cable channels and the press to dump mark to market? I've even seen a former FDIC person on CNN calling for changes in accounting rules. I don't understand, these people should know better but they are proposing the very thing they should know will prolong the crisis. Why? How? Are the heads of governmental finance as incompetent as "Brownie"? This just makes no sense to me and it frankly scares me.
Mark-to-market isn't perfect. Bubbles can send market prices to unreasonable levels. Bursting the bubble can send market prices unreasonably low. Without being a big accounting genius, I still say that if a mortgage bond is paying interest on time, or if it's a strip, the underlying mortgages are being 95% paid, then the bond CAN'T be worth as low as 30 cents on the dollar.
IMHO, Glass-Steigal (sic?) repeal is at the heart of this crisis. If banks stuck to taking deposits and making loans, there would be no problem with security pricing, exoyic or otherwise.
There is no excuse for the government caving in to allow this change. You are absolutely right when you say they'll just be making shit up. The interesting thing is that the same people who are complaining that the problem is a lack of liquidity are the same people saying that today's market price is NOT what should be used -- well, if it's liquidity they need, then it's certainly the market price that should be used.
Money doesn't talk, it swears. Those with the most to gain (or lose) here are very clearly saying, "F*@k y'all, I'm gettin' mine!"
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