A review of “fair value” accounting promises to be a long, painful procedure that not only carries with it the possibility of severe and potentially deadly infection, but entails a long recovery time and is likely to reveal any number of other tumors and growths that threaten to be a bigger deal than the original concern.
Accounting pathologists that we are, our attention has been rapt.
Take a seat in the visitors observation lounge. We’re going in.
What the hell is it?
FAS 157 “defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles (GAAP), and expands disclosures about fair value measurements.” In other words, it tells you how to count. When to count. What to count. When to recount. And when to count down to zero.
Occasionally, authorities (and those lacking any authority in the topic at all) can be seen pointing suspiciously accusing fingers at FAS 157 with an eye towards blaming the rule for the many ills that presently plague the financial system. If it wasn’t for FAS 157, the argument goes, banks wouldn’t have to admit that the assets on their books were actually either worth next to nothing, or were impossible to trade and therefore were actually worth something like nothing at all.
Of course, the mistake here is in assuming that simply not disclosing that the bank is insolvent keeps it from being insolvent.
firstmayoshamwow
http://finance.google.com/finance?q=GOOG
Someone take a look at the intraday low for GOOG.
Somebody got fucked.
http://cgi.ebay.com/ws/eBayISAPI.dll?ViewItem&Item=320306090254&Category=11153&_trksid=p3907.m29#ht_1389wt_0
EP – isn’t the only thing to consider especially with the predominance of CDS effecting companies – accounting for derivative instruments is another huge issue.
If Congress can’t pass a bailout bill…how the hell is the SEC going to decide with FASB to change one of the most complex rules there is.
Grabbing. At. Straws.
But it does help enormously when justifying overpayment for said assets, ep.
Stop the bailout!
http://www.stopthehousingbailout.com/
EP – thank you!
Now the same republicans that voted nay yesterday because they want “free markets” to rule are saying that all the needs to happen is to eliminate this rule.
Isn’t a “free market” based on the principle that the price of something is what you can buy and sell it for?
best part about #3 is that you can buy the website and “pay nothing until 2009 with the new ebay mastercard”
oh wait…
An excellent and insightlfull explanation by Atlanta Fed governor at following link.
A MUST READ!
http://marketwarnings.blogspot.com/2008/09/credit-and-financial-crisis-explained.html
@EP Isn’t there a legitimate scenario where a company intends to hold a group of CDOs that are “impossible to trade and therefore were actually worth something like nothing at all.” If the company intends to hold them to maturity – presumably when they will be worth substantially more than nothing – isn’t the near-term loss manufactured by accounting standards?
@#3 – I’d put my money on a porn company making that purchase. “Bailout Babes” or something to that effect.
10 I believe if they intend to hold them to maturity, they designate them as such and can therefore avoid any mark to market. Life insurance companies do this with their “General Funds” – the commingled pools that are there to eventually pay death benefits. Any expert to confirm or deny?
@10 wouldn’t a mortgage be worth $0 at maturity since it has been completely paid off at that time and cease to exist?
Even if you have collateralized the mortgages / their payments wouldn’t that theory still hold?
Am I missing something?
13 What you’re missing is that everytime the holder collects one of those payments it would write down the mortgage on its books, so that at maturity the morgage would be worth $0, but so would the book value.
10 The corollary (sp?) to this is when companies issue long term debt. They carry it at the issue price (typically par or close to it) and don’t mark it up or down as interest rates change the value of that debt, the reason being that they intend to keep it outstanding till maturity, at which time they will pay it back at…. PAR!!
I am involved in the structured credit business (for now), and I actually think that this MTM change is the only way out. Plenty of the CDOs that are marked at 20 cents are going to recover 75 or more. But because there are no buyers, and dealers are cowards, they mark them as low as possible to avoid being sued. If you cant sell your house in 6 months, is it worthless? Should you be forced to file? Temporary lack of buyers doesnt make something worthless. This stuff isnt worth par. But it isnt worthless either. Most of the paper is performing fine and pays interest quarterly.
I am involved in the structured credit business (for now), and I actually think that this MTM change is the only way out. Plenty of the CDOs that are marked at 20 cents are going to recover 75 or more. But because there are no buyers, and dealers are cowards, they mark them as low as possible to avoid being sued. If you cant sell your house in 6 months, is it worthless? Should you be forced to file? Temporary lack of buyers doesnt make something worthless. This stuff isnt worth par. But it isnt worthless either. Most of the paper is performing fine and pays interest quarterly.
@17/16,
You are making the same logia mistake most of these blowhards on Bubblevision are doing, namley, forgetting that the VAST amount of these “assets” were purhcased on MARGIN. This is the key to this whole clusterfuck, and I’m not surprised the bubbleheads aren’t talking about it- thier livlihoods depend upon these same dolts who leverd up 20/30/40-1 in some cases and purchased these asstes on a very skimpy equity. So you see, its not just a matter of ‘accounting’ and holding to maturity. No, my good blogger, these people are marking liberally, not conservativrly due to the same lie on thier books and teh levered values of these aame assets.
Toodles, me and my lady leave for Jakarta tomoorow.
Toodles@#18…
Jakarta? Hahaha!! WTF would any sane person want to go to f’n Jakarta?
What a waste of vacation.
The Guy from Delaware
No 18, is this the “complicated” everyone is talking about?
Geez, Everyone bought these things because really, who doesn’t always pay their mortgage? The returns were enormous. So I guess when the housing market started its downward spiral in some places and now probably every where, people actually listened to Cramer when he announced last year to “walk away”. So I guess we have abandoned, stripped homes and non performing mortgages. So, they made a bet and they lost. Why does there have to be a rescue plan then?
May I have a loan based on the fair value of my employment wages and condo?
@17/16,
There are buyers. Don’t lie. If you’re not happy with their $0.08 on the dollar valuation, that doesn’t mean there’s no buyers. Next!
“If you cant sell your house in 6 months, is it worthless?”
Sorry. Another BS. No such thing as you can’t sell your house. It’s all about valuation. If you offer your house for the price of a corndog, do you think people won’t buy it? Next!
You are mistaking market value and true value. The value of the CDO may really elevate 6 years from now but that doesn’t mean I should pay the future value.
The market value takes into account the exogenous factors such as market liquidity, confidence, industry trends at a certain period.
Oil was dirt cheap in the past but should those poor folks then be forced to pay $100 because of the future China/India effect? Next!
@18
WTF! Why are you going there for? The girls there are hot though.
@22…corn dog.
TGFD…thats funny shit.
10 – This is true, you could opt for HTM treatment. However, if the item becomes impaired (which everyone agrees that these things aren’t worth 100% of their value) you still have to mark down the HTM asset to what you think you’re going to receive. Since we can’t come up with feasible estimates of what will be received from these items, that’s hard to do. Fair value is just as nebulous for the same reason though.
sooo .. you don’t actually spend time running your distressed hedge fund then?
It’s true that most CDOs were purchased to hold to maturity and even in the heyday of trading, not many secondary pieces were moved. So, having fair value accounting that is essentially dealers pricing these things as if they’d have to buy them back, it’s a little wrong. CDOs are more like cars in this sense, I think, than homes. People always underbid on second hand cars no matter what. But, the liquidity issue is only one of the issues. Even factoring this in (somehow), there are pricing problems across the different types of CDO assets, so I’m not convinced that FASB 157 is all that wrong.