• 06 Aug 2008 at 2:46 PM

From Mark-To-Market To Fair Value

The debate over mark-to-market accounting rages on.
The accounting standard known as FAS157 has been criticized by some bankers, notably Blackstone Group chief Steve Schwarzman, for needlessly causing big write-downs and encouraging financial panic. It’s defenders include Goldman Sachs, which pointedly left the Institute for International Finance in June, a banking lobby group, over the IIF’s anti-mark-to-market stance. Last week Treasury Secretary Hank Paulson defended mark-to-market during a talk he gave at the New York Public Library (which, ironically, is now officially called The Stephen A. Schwarzman Library.)
“I believe in fair value accounting,” Paulson said.
Over at the Deal, Robert Teitelman cries foul, accusing Paulson of restating the debate in question-begging terms.

Now “fair-value accounting” has been around for awhile, but increasingly its patrons are using it to nudge aside the far clearer and more precise term “mark-to-market.” “Fair value” contains a kind of moral imperative. Mark-to-market lays its weary head on the markets. Fair value, is, of course, by definition, fair. Who can argue with that?


Paulson and the triumph of fair-value accounting
[TheDeal]

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Comments (28)

  1. Posted by guest | August 6, 2008 at 3:03 PM

    Can’t we just go back to mark-to-model pricing and pretend that this whole thing never happened?

  2. Posted by Anal_yst | August 6, 2008 at 3:29 PM

    One fundamental issue with fas 157, in my understanding, is that it necessitates that the “fair value” may have to reflect fire-sale prices for assets, when in all actuality, those assets are worth more than they would fetch if sold under such circumstances, among other shortcomings in the fules

  3. Posted by guest | August 6, 2008 at 3:29 PM

    It will all be funny money if we keep printing it at this rate. So. Mark it any way you want.

  4. Posted by guest | August 6, 2008 at 3:45 PM

    Paulson? Restating the debate in question-begging terms?
    No, he has the implicit right as former CEO of Goldman Sachs and current U.S. Secretary of the Treasury to define reality.

  5. Posted by guest | August 6, 2008 at 3:50 PM

    @ 2 – fas 157 does not contemplate fire sale. It actually refers to the concept of an orderly transaction (allowing for marketing activities that are usual and customary for such assets).
    @ 1- fas 157 acknowledges mark-to-model, just makes you disclose how market observable your assumptions/inputs are by classifying them as level 2 or 3.
    good to see the masters of the universe here understand accounting…

  6. Posted by guest | August 6, 2008 at 3:51 PM

    UnifiedMarket is able to provide true price dicovery.

  7. Posted by bank_teller | August 6, 2008 at 4:12 PM

    @5 — you have to remember that anal_yst isn’t a MOTU, he’s just back orifice.

  8. Posted by guest | August 6, 2008 at 4:19 PM

    #5 The problem is that you dweebie accountant types have trouble distinguishing between a fire sale price (which is everything in the context of the current asset backed market) and a sale between a willing buyer and a willing seller.
    The other interesting part of FAS 157 is “marking to market” of a company’s liabilities to help offset losses on assets (thank you Goldman). Check out AMBAC’s earnings release.

  9. Posted by guest | August 6, 2008 at 4:33 PM

    @8 nice try. In the current ABS market, isn’t it just shitty prices because of few buyers/lack of liquidity. There is a difference, but if you want to believe thats illiquid = fire sale, go ahead.

  10. Posted by guest | August 6, 2008 at 4:34 PM

    It’s like 1984.

  11. Posted by Anal_yst | August 6, 2008 at 4:40 PM

    @ #5
    It may not be the intent, but that is certaintly what has been the effect on more than one occassion. I make no representations to be an expert on this matter, but certain facts are undeniable.

  12. Posted by guest | August 6, 2008 at 4:45 PM

    If a company is forced to sell assets into a disorderly market to raise capital ala Merrill that sounds like a distressed seller to me. That should not be the benchmark for marking assets on a balance sheet especially if those assets are performing.

  13. Posted by guest | August 6, 2008 at 4:46 PM

    @#3: “It will all be funny money if we keep printing it at this rate. So. Mark it any way you want. ”
    Mark it 8, dude.

  14. Posted by whatelseisgoingon | August 6, 2008 at 4:50 PM

    @9… I think @8 is saying that illiquidity doesn’t equal fire sale. However accountants look at any traded price, no matter the context, and assume it is the right price.
    I guess sarcasm isn’t an accountants strength either

  15. Posted by guest | August 6, 2008 at 4:50 PM

    @12 Completely agree with you, and I don’t think that was what @9 was trying to get at. Merrill was firesale, and thats not what 157 contemplates.
    Of course, many may take the kitchen sink approach to put this behind them, which is the real farce on the accounting side.

  16. Posted by guest | August 6, 2008 at 6:02 PM

    The right price ‘fair value’ is what the market will bear or clear. No bid no price everything else is semantics.
    Next thing you know IB’s will be paying inflated annual bonuses on ‘profits’ ‘booked’ from products that will only payoff in the future is at all. No wait…

  17. Posted by guest | August 6, 2008 at 6:03 PM

    The right price ‘fair value’ is what the market will bear or clear. No bid no price everything else is semantics.
    Next thing you know IB’s will be paying inflated annual bonuses on ‘profits’ ‘booked’ from products that will only payoff in the future if at all. No wait…

  18. Posted by guest | August 6, 2008 at 6:03 PM

    The right price ‘fair value’ is what the market will bear or clear. No bid no price everything else is semantics.
    Next thing you know IB’s will be paying inflated annual bonuses on ‘profits’ ‘booked’ from products that will only payoff in the future if at all. No wait…

  19. Posted by guest | August 6, 2008 at 6:10 PM

    What would TGFD say?
    TOGFD

  20. Posted by guest | August 6, 2008 at 6:26 PM

    Who the hell cares what TGFD would say? You could tell us if you wanted to, TOGFD. Coy lunatic.

  21. Posted by Anal_yst | August 6, 2008 at 7:04 PM

    @ 16/17/18
    Not quite.
    If I need to raise cash NOW, this is not going to be missed by other market participants, who will offer me below what they might in a “functioning” market place, this creates an observable transaction/price inputs which, due to fas 157, others must (to varying degrees obviously) use to value the securities they hold.

  22. Posted by NotNasser | August 6, 2008 at 8:35 PM

    Explain this to me, he/she who will.
    In terms of the fair value of liabilities: under existing law and GAAP (or IFRS for that matter) is it true that a company that owes money can reason that (1) it isn’t as credit worthy as it used to be, hence (2) the paper is accordingly worth some discount in its face value to the counterparty, hence (3) it is worth some discount to face value as a liability on the balance sheets of the debtor, too.
    That might seem counterintuitive, but if it is a plausible reading of FAS 157, don’t companies get a valuation boost from the decline of their own credit? Is that entirely a balance sheet thing, or would it show up as an earnings boost, too?
    And in either event, are investors likely to be fooled into paying more for a company’s stock than in some sense they ‘should’?

  23. Posted by guest | August 6, 2008 at 9:21 PM

    MTM breaks down when the “fair market” valuation of an asset becomes more difficult. That could mean a number of things – illiquidity, or opacity, or who’s in the test market – you wouldn’t sell a Monet at a yardsale.

  24. Posted by Anal_yst | August 6, 2008 at 11:32 PM

    @ NotNasser
    Forgot where I saw it but just recently one particular company (probably easier to find if you’re more ambitious than I) should have booked a loss but, because of the situation you described, booked a “gain”.

  25. Posted by guest | August 7, 2008 at 4:53 AM

    @ NotNasser & Anal_yst – Is this not with ML & some of the other IBs have recently done w/ their bank debt? As the value of that debt has decreased in value, they have in turn booked this as a decreased liability.

  26. Posted by guest | August 7, 2008 at 8:53 AM

    Real question is how Sami Bossart’s personal opinions will be dealt with.

  27. Posted by guest | August 7, 2008 at 7:44 PM

    @21
    Sure – that stuff Merrills sold at 22c in the dollar. I’m a distressed seller (broadly known as the rest of the banking system)and offer you $1000bn just like it – where’s the bid ?
    It’s not rocket science how much does the average bank balance sheet have to shrink to get CAR to 10% ? Do I hear 45%, 50% you say…
    A number of banks in Europe and probably elsewhere have been told by their central banks that they may not lend until CAR is where it should be period. Unfortunately many of the higher ups are still playing fast and loose with Tier 3 valuations and moving the deckchairs around but that doesnt change the name of the ship.

  28. Posted by Anal_yst | August 7, 2008 at 7:56 PM

    @ 27
    Not quite sure what point you’re trying to make, but the Titanic analogy probably won’t turn out to be that far off, at least for some