Fair Value: Current Developments and Long Run Ramifications

EU, IASB Change Fair Value
Rating Agencies Chime in on Fair Value Fight
Today the International Accounting Standards Board (IASB) published proposals to improve the disclosures around financial instruments including fair value measurements of financial instruments and liquidity risk. The changes are described here .

According to the IASB, the proposals form part of their response to the credit crisis and follow recommendations of the Financial Stability Forum, which had the support of the Group of Seven (G-7) Finance Ministers. The proposals also reflect discussions by the IASB’s Expert Advisory Panel on measuring and disclosing fair values of financial instruments when markets are no longer active—see

Sir David Tweedie, Chairman of the IASB, described the proposals this way: “The credit crisis has heightened concerns about liquidity risk and pointed to the need for entities to explain more clearly to the outside world how they determine the fair value of financial instruments, especially those that are particularly complex. The proposals build on the advice we have received from the IASB’s Expert Advisory Panel.”

Meanwhile committee of the European Commission (i.e. the people who run the EU) OK’d the IASB changes to mark-to-market rules. The changes allow firms some flexibility when applying mark-to-market rules where there is no an actively traded market for an asset. This follows guidance released last week by the FASB.

A few excellent articles on the subject of Mark to Market/Fair Value:

Excerpt from a WSJ article on regulation of the financial services industry:

Fair-value accounting
The issue: Should firms, including banks, value their assets at their market prices, no matter how illiquid they are?

The protagonists:
In favor: the International Accounting Standards Board; the Securities and Exchange Commission; accounting firms.
Against: some large banks and brokers; U.S. Republicans, including Republican presidential candidate John McCain; French President Nicolas Sarkozy.

The debate: Fair-value rules became a topic of controversy in Europe in 2005, when all listed European companies adopted International Financial Reporting Standards, which required them to record an extended range of financial instruments such as derivatives and bonds at fair value on their balance sheets. Companies had previously been able to value many such instruments at historical cost, allowing them to avoid the complexities of subjectively attaching a price to abstract or illiquid assets.

Many bankers and political leaders, including Messrs. Sarkozy and McCain, argue that fair-value accounting is exacerbating the credit crisis by requiring companies to report unrealized losses, forcing them to top up their balance sheets through asset sales that debilitate them further.

One reply, frequently made by accounting-standards bodies, is that fair-value accounting is exposing the scale of the problem at a time when transparency is vital. Fair-value also allows for comparisons between companies in the same sectors and gives investors a far better appreciation of risk management than would be possible under cost accounting.

Its detractors also argue that it heaps volatility on earnings. It also places a heavy emphasis on the judgment of a company's management, which ultimately decides on the fair price of the hardest-to-value assets. This means losses that may never be realized can bring down companies that are solvent, while companies can talk up profits that may never materialize. Think of Enron, they say.

Likely outcome: The International Accounting Standards Board is engaged on a project to simplify and replace the most complex fair-value rules after the Financial Stability Forum mandated it to look at the issue in April. It is expected to publish updated guidelines next year.
In the meantime, regulators won't want to indulge banks that are being pilloried for irresponsible behavior. However, international accounting boards have already moved to ease fair-value requirements and rules may be relaxed further until the credit crisis is perceived to be over.

The Financial Stability Forum, the body of central banks and financial regulators coordinating the global response to the turmoil in the credit markets, is also looking into tweaking fair-value rules to soften the forces that push the world economy into booms then busts.
By DOMINIC ELLIOT at the Wall Street Journal

Banks: The Fight over Fair Value
S&P Ratings tells why that's a bad idea for financial firms to suspend or change the rules concerning asset markdowns.

The current market disruption has triggered a chorus of complaints from many financial institutions and other market participants about the effect of fair value accounting, including an outcry to suspend or substantially modify the rules. The push to suspend and evaluate the accounting for fair-value measurements is evident in sections of the Troubled Assets Relief Program (TARP) legislation. The concerns relate primarily to accounting rules that force financial institutions to value securities at what they believe are overly depressed prices that do not reflect their true value. Further, they contend that reporting these depressed values has resulted in a loss of market confidence that has further exacerbated the current credit market disruptions.

This may seem to imply that fair-value measures should be dispensed with altogether. To the extent that fair-value accounting guidance is suspended or modified, in the absence of addressing analytical needs through greater disclosure and transparency, Standard & Poor's Ratings Services would view these changes as a significant step backward. However, we do believe the recently issued Securities & Exchange Commission and Financial Accounting Standards Board (FASB) guidance, which clarifies how companies should determine fair-value measurements in light of the current market conditions, is helpful.

We recognize that accounting for assets and liabilities at market prices can produce results that could mask the underlying economics for certain businesses and activities, especially during volatile and uncertain economic and market conditions. Yet, we believe the limitations inherent in fair-value accounting do not detract from the usefulness of fair-value measurements in providing a consistent starting point in analyzing financial statements. Rather, the imperfections underscore the need for financial statements to complement fair-value measures with additional information about uncertainties in the measurement of assets and liabilities. Thus, we recommended that certain refinements to fair-value accounting and disclosures be considered.

Fair Value: How Useful?
In the wake of the recent market stress, some market participants question whether fair value provides useful information for investment and credit decisions. Company executives contend that the performance measures produced using fair value create financial reporting that is misleading and disconnected from the reality of their business activities. They also say it creates unjustified and unexpected economic effects, including covenant and regulatory capital stress and liquidity shocks.

Further, there are bank analysts who don't agree that marking loans to market is the best way to assess loan portfolios because it presents a view of the portfolio valuations without giving effect to the expected future earnings that would help cover potential losses.
Many critics have faulted fair-value accounting for creating a spiral of declining valuations arising from forced asset sales. For many financial institutions, mark-to-market losses—coupled with the triggering of significant margin and regulatory capital calls—have forced rapid asset liquidation, exacerbating the loss of value, diminished counterparty confidence, and constrained liquidity.

Recent distressed asset sales by Lehman Brothers Holdings (LEH), Merrill Lynch (MER), and other distressed asset portfolio sellers set a precedent concerning asset valuations; the actual prices became benchmark prices for real-estate-backed assets and other asset classes. Lehman announced gross mark-to-market losses approximating $7 billion on residential and commercial mortgage-related positions immediately preceding the company's downfall. The impact of these marks on Lehman's financial results contributed to intensified efforts to offload its exposure in residential mortgages and commercial real estate loans and other less-liquid asset exposures.

Merrill Lynch sold a substantial majority of its collateralized debt obligations, incurring a $4.4 billion pretax loss (a 40% decline in its mark in a matter of weeks) in an effort to enhance the company's capital position and reduce risk exposure. The rapid and extreme portfolio devaluations that ultimately contributed to Lehman's failure and Merrill Lynch's loss of independence also became observable inputs for fair-value pricing by other financial institutions.

Also momentous was American International Group (AIG) capital raise of approximately $20 billion by the second quarter of 2008 to replace essentially all of the capital lost in the preceding two quarters because of market valuation losses and other-than-temporary impairments on mortgage-related securities. During the third quarter, however, liquidity demands increased, leading to AIG's unprecedented $85 billion secured loan facility agreement with the Federal Reserve on Sept. 16, and a subsequent securities lending agreement providing an additional $37 billion in liquidity.

The challenges faced by market participants struggling to determine representative fair values in volatile and illiquid markets, in the absence of further guidance, would have stressed any financial reporting system.

Proponents of reforming fair-value measures look to influence the U.S. Congress, the SEC, banking regulators, and accounting standard-setters, asserting fair-value accounting is faulty. They assert this is largely because of inadequate guidance and the impact of FASB Statement of Financial Accounting Standards No. 157, Fair Value Measurements (SFAS 157) on financial instrument valuations in distressed or illiquid markets. Similar calls are echoed globally.

The SEC and the FASB recently responded to this call by issuing guidance clarifying practical issues surrounding the application of SFAS 157 in determining market prices. We believe the additional guidance is helpful in clarifying the application of fair-value accounting during periods of market illiquidity. Yet, many other market participants call for the suspension of fair-value accounting altogether.

The recent SEC and FASB guidance emphasizes that fair-value measurements and the assessment of impairments are subject to significant management judgment. As a result, it reiterated the need for clear and transparent disclosures to provide investors with an understanding of the significant judgments management has made. In addition, the SEC issued letters in March and September providing further guidance and requesting enhanced disclosures surrounding fair-value measurements. The FASB has also taken steps to clarify how the fair value of a financial asset should be determined when the market for that asset is not active.

The SEC and FASB clarifications will potentially ease the greater weight placed on values derived from current market transactions for the valuation of similar or identical positions when markets are less active or distressed. Broadly, all other things being equal, we believe the effects of this guidance on financial institutions may increase GAAP [Generally Accepted Accounting Principles] equity and regulatory capital. There might also be a short-term earnings boost through a mark-up for some previously written-down assets, as values are based on greater use of intrinsic valuation assumptions.

Congress looks to the SEC
Section 132 of the TARP gives the SEC broad authority to suspend the use of SFAS 157 by issuer class or category of transaction, if it deems it necessary or appropriate in the public interest, and is consistent with the protection of investors. Section 133 requires the SEC—in consultation with the Federal Reserve Board and the Treasury—to study and report to Congress on SFAS 157 adoption and implementation and the impact to the markets within 90 days. It includes studying the impact and effects of SFAS 157 in the context of:
• A financial institution's balance sheet;
• Bank failures in 2008;
• The quality of financial information available to investors;
• The process used by the FASB in developing accounting standards;
• Advisability and feasibility of modifications; and
• Alternative accounting standards to SFAS 157.

The nature or extent of disclosure that would be required in the suspension of SFAS 157 or the absence of its disclosure requirements is unclear. However, suspension of the guidance could result in market participants questioning valuations. Under these circumstances, it seems analysts and investors will view the resulting valuations with greater skepticism, resulting in further erosion of investor confidence in valuations that could complicate recent efforts to stabilize the capital markets.

We reiterate our belief that fair-value accounting should continue to have a significant role in the accounting for financial assets and liabilities but that it should be reinforced and enhanced with more informative disclosures and revisions to the income statement to achieve desired financial reporting objectives.

To succeed in improving fair value measurement guidance, active participation and contributions by all affected constituencies (including companies, accounting standard setters, auditors, investors, regulators, and analysts) is essential. This ultimately could lead to an improved financial reporting discipline that will be capable of meeting the information needs of investors and creditors, and of supporting the evolving global capital markets, under varying economic conditions, for many years to come.
By Joyce Joseph-Bell, Ron Joas, and Neri Bukspan From Standard & Poor's RatingsDirect

Rating Agency Believes Future Impairments May Overshadow New Fair Value Guidance for U.S. Life Insurers
Recently, the SEC and FASB issued a joint statement (1) 'clarifying' guidance on mark-to-market rules for valuing balance sheet assets in the current market environment. The new guidance essentially gives management discretion to use their own estimates (Level 3 in the fair value hierarchy (2) in those cases where market observations (often classified as Level 2 in the fair value hierarchy) do not reflect orderly transactions in this illiquid market. However, management estimates must incorporate current market participant expectations of future cash flows and include appropriate risk premiums, which Fitch believes may limit any significant benefit in valuation.

Companies - including U.S. life insurers - have typically marked-to-market structured securities using broker quotes or related index pricing on a GAAP or IFRS basis, which has led to significant unrealized losses reflected on the GAAP/IFRS balance sheet as a reduction of shareholders equity. Although this guidance may be considered potentially positive from a current valuation perspective, any benefit could be overshadowed by the aging of existing unrealized losses on structured and other securities that may need to be recognized as other than temporary impairments (OTTI), in Fitch's view. Thus, the clarifying guidance may not ease future capital pressures for U.S. life insurance companies, and such potential capital pressures continue to support Fitch's Negative Outlook for U.S. life insurance ratings.

On a U.S. statutory basis, impairments have been moderate through the first half of 2008 due in part to the less onerous nature of statutory impairment tests for structured securities relative to GAAP/IFRS. Therefore, many insurers have recognized impairments on a GAAP/IFRS basis, but not on a statutory basis - this is an important distinction. Under statutory accounting principles, most bonds are carried at amortized cost. Under GAAP/IFRS, most bonds are carried at fair value. Fitch believes that over the next several quarters insurers will more closely align their statutory impairment practices to GAAP/IFRS as new regulatory guidance is introduced. This will likely mean increased statutory impairments. Therefore, Fitch believes that current statutory capital for the industry is overstated relative to economic capital due to the less onerous accounting for structured securities.

Under the SEC/FASB guidance, companies could measure fair value for structured securities using a discount of expected cash flows, which in Fitch's view is an approximation of true economic value of the securities. In Fitch's opinion, expected cash flows from certain tranches of residential mortgage backed security (RMBS) portfolios originated in particular years may be higher than the current market value indicates. Fitch also believes that expected cash flows from certain pockets of exposure are susceptible to significant losses - particularly Alt A and subprime RMBS originated in 2005, 2006 and 2007. OTTI on these securities should reflect the high level of losses expected.

The Troubled Asset Relief Program (TARP) may set future market prices for structured securities that will be used by all market participants regardless of participation in the program. This would constitute a Level 1 valuation in the fair value hierarchy that would supersede management's estimates.

In the near term Fitch believes RMBS market illiquidity is manageable. As long as life insurers have sufficient liquidity to meet near-term policyholder obligations, they can hold RMBS securities on their balance sheets. Life insurers' risk management programs typically include strict asset/liability matching of durations. In most cases, life insurers average liability durations are between 5 and 10 years, which gives life insurers flexibility in buying and selling securities when managing their investment portfolios. However, if market illiquidity persists and/or policyholders lose confidence in the industry, assets may have to be liquidated sooner than expected and at a significant loss. Regardless of market liquidity, if material cash flow losses begin to emerge on these securities, then the life insurance industry's capital adequacy will be adversely affected.
Notes
(1) The joint statement from the SEC and FASB on Sept. 30, 2008 was confirmed in a FASB Staff Position paper released on Oct. 10, 2008.
(2) The fair value hierarchy is described in FASB Statement No. 157, Fair Value Measurements.

SOURCE: Fitch Ratings

The Bankers’ Case Against Fair Value--Going Back 20Years

The American Bankers’ Association has launched its latest salvo in its long-running opposition to fair value use in financial institutions. The bankers have have written to Henry Paulsen asking for changes to the mark to market rules and have asked the SEC to force a change as well. The Bankers state that the most recent pronouncements of the FASB/SEC so not address current problems.

The Bankers’ case goes back a long way--at least as far as 1999 (and further) with the release of this comment letter, back when the the FASB first began to advance the case for greater fair value use in determining the income of financial institutions. Portions of their case from that letter (remember this is from 1999):

• Users of bank financial statements do not support the proposed change to full fair value accounting. This is because a full fair value system does not provide a sound basis for predicting banking book net cash flows and lacks relevance.
• Banking book income is earned on an ongoing basis over time and not from taking advantage of short term fluctuations in prices; the accruals accounting method provides a dynamic and faithful representation of both this earning process and the manner in which a bank’s management operates. It, therefore, provides a more relevant and reliable representation of this earning process. A notional fair value snapshot taken at a historic balance sheet date fails to achieve this.
• The reality is that fair values for a banking operation are significantly more subjective than values derived under the mixed measurement accounting model and this would reduce both the reliability and comparability of financial statements.
• Within any given accounting measurement model, it is not possible to encapsulate in a single measure everything that an investor needs to know. Both fair value and historical cost accounting need to be supplemented by appropriate risk-based and other disclosures in order to provide investors with a complete picture.
  

The Bankers' points in other older comment letters are eerily relevant to today’s dilemma: "Notwithstanding the development of securitization techniques and credit derivatives, it remains the case that customer loans are generally held to maturity by banks without variation of the original contractual terms of the loan. Accounting for these loans on an historical cost basis, therefore, most closely reflects the economic substance and cash flows, namely, that income is earned over the period of the loan. The bank is exposed to risk on the non-repayment of the principal advanced. "

"It has been argued that the fair value of a customer loan provides relevant information about the current credit quality of that loan; as a borrower’s credit standing deteriorates, the credit spread demanded rises and therefore the fair value falls and a loss occurs. However, this loss is theoretical because the widening of the spread neither has an impact on the existing loan contract nor on the ultimate repayment of the loan in the majority of cases. "

We do not support the FASB's move toward fair value accounting. This will have a significant impact on all industries and will significantly impair the comparability of financial statements. The indication on the FASB's website that the IASB " believes that the fair value option will enable constituents to become more familiar with using fair value as a measurement attribute for financial instruments" is frightening. Experimental accounting, without sufficient study, should not be used for financial reporting measurement purposes, particularly because it can have such a significant impact on an entire industry. If this is the goal, then the FASB and IASB should provide a discussion document for comment on fair value. This document would need sufficient study and consultation with industry and users prior to issuing a standard. Without sufficient study, this experiment could fail. The indication on the FASB's website that the IASB " believes that the fair value option will enable constituents to become more familiar with using fair value as a measurement attribute for financial instruments" is frightening. Experimental accounting, without sufficient study, should not be used for financial reporting measurement purposes, particularly because it can have such a significant impact on an entire industry.

International Accounting Standard Setters follow FASB on Fair Value

The International Accounting Standards Board stated in a press release this week that they agree with the FASB on their fair value guidance on applying fair value in inactive markets released last week. Just to avoid misinterpretation, the head othe IASB, Sir David Tweedie, added his own interpretation: “This press release says two things. First, that guidance within IFRSs is already clear that distress sales should not be included in fair value measurement. Secondly, that recent guidance from the FASB is consistent with the findings of our own expert panel on illiquid markets.”

As well, in response to political pressure, the IASB indicated that they would study the matter of reclassifying a financial asset from ‘held-for-trading’ to “another category”, presumably “held to maturity”.

Bad 'Ol Mark to Market

Reverse Leverage of Mark-to-Market Wrecks Banks
The world's banking system is caught in a vicious trap, with a forced sale of assets at one institution wiping out capital at others holding similar assets. Think of it as extraordinarily high reverse leverage. You can blame mark-to-market accounting, the advent of new indexes that supposedly track values of a wide range of assets, or a market mind-set that assumes every asset is part of a bank's trading book.

Like the old Pac-Man character, this combination is devouring financial institution capital at a voracious rate. The question is whether it will gobble up even the new capital injections into banks by the U.S. and foreign governments. It's way past time to suspend mark-to-market accounting -- or somehow to make investors and analysts understand that fire- sale transactions aren't supposed to be having such broad implications.

Of course, suspending mark-to-market would be greeted by screams of outrage by its devotees, including those at the Financial Accounting Standards Board and the Securities and Exchange Commission. After all, the mark-to-market rules are supposed to provide investors with needed information about the true state of a company's balance sheet.

In the midst of this financial crisis, mark-to-market isn't necessarily telling the truth. The notion of pricing assets on the basis of what they would bring if sold today -- even if an institution doesn't have to sell them -- creates a paper loss that reduces capital and restricts lending.
John M. Berry, Bloomberg

IASB Relents on Mark to Market Rules

The IASB has taken the unusual step of suspending its normal due process to deal with changes to mark to market rules. The change comes under pressure from European Union politicians such as Nicolas Sarkozy of France. The following excerpts from an article by John Rega of Bloomberg sets out the issues.

In step with U.S. rule makers, the International Accounting Standards Board plans next week to ease ``fair-value'' rules that have forced banks to take writedowns on losses in securities holdings. The IASB's supervising foundation today waived procedures, such as requesting comments from the public, to accelerate changes to the rules used in more than 100 countries.

European government leaders have called for the change to give their banks the same rules as U.S. companies, following a move to change U.S. Generally Accepted Accounting Principles. The IASB overseers, the International Accounting Standards Committee Foundation, said today that their action wasn't spurred by political pressure.

``Any weakening of the IASB's independence would be likely to reduce transparency,'' said the foundation, which oversees the board's working methods. Interference would ``potentially lead to a weakening of standards worldwide, and would ultimately undermine investor confidence at a fragile time.''
The European Union, the biggest group users of International Financial Reporting Standards, already plans to make a change to the same effect. The bloc's executive arm next week will propose changes to the rules for how IFRS applies in the 27 countries.

The IASB and EU moves will let banks reclassify some of their holdings as banking assets, a shift -- normally forbidden -- from the so-called trading book, where values are subject to more volatility from fluctuations in market prices. Securities, loans or other assets held as investments continue to be ``marked to market,'' or revalued with swings in market prices.

The change is ``as a matter of urgency,'' EU Financial Services Commissioner Charlie McCreevy said yesterday in a speech at the European Parliament in Brussels. He called on the lawmakers and national governments to sign off on the revision in time for banks to apply it in reporting third-quarter results, typically published as soon as the end of the month.

SEC Plays Fair on Mark to Market

SEC to CFOs: You Can Be Flexible on Fair Values
The SEC sent letters to about 30 CFOs of financial institutions last month outlining information they should include in financial statements if they're using measures other than market prices for valuing certain assets. As reported, the SEC also issued guidance last week to companies saying they needn't rely exclusively on market prices.

"It's not a get-out-of-jail-free card, but it's an opportunity to say 'here's a rationale as to why we're using an alternative valuation,'" said Brian Lane, a former director of the SEC's division of corporation finance. He said it will give companies flexibility to use other data, such as historical pricing, to come up with a value. "If you can lay out the case, you can try it. You have to put in some disclosure about how you arrive at that."
The letters, which are dated September 2008 and sent in the middle of the month, say executives should "continue to evaluate whether you could provide clearer and more transparent disclosure regarding your fair value measurements."

For example, if a company is relying on discounted cash flow instead of market prices to determine the value of a security, the SEC is urging companies to disclose whether assumptions were changed from earlier periods.
Companies are also being prodded to say whether they use quotes from brokers and explain if they picked a quote from a new broker -- which could indicate they were shopping around for a favorable number.
Kara Scannell at the Wall Street Journal

More Advice on Marking to Market

The International Auditing and Assurance Standards Board (IAASB) — has released its advice on dealing with the application of the mark to market rules in IAS 1 and IAS 39 under IFRS.

The alert discusses:
• Challenges faced in accounting on the basis of fair value;
• Requirements and guidance in standards that are particularly relevant to fair values;
• Other considerations in audits of fair value
accounting estimates;
• Initiatives of the International Accounting Standards Board; and
• Recent revisions to extant standards on auditing
accounting estimates and fair value measurements and disclosures which, while not yet effective, may be helpful to auditors.

Don't Bury Fair-Value Accounting Just Yet

Linda A. MacDonald of FTI Forensic and Litigation Consulting recently joined FTI after nearly 12 years at the F.A.S.B., where she managed the project that established S.F.A.S. 157. She writes that despite rumors to the contrary, the S.E.C. has not repealed F.A.S. 157.

It is worth noting that F.A.S. 157 is not the reason that in today's markets many assets are impaired. Further, F.A.S. 157 does not require any assets to be recorded at fair value, whether on an ongoing basis (so-called "mark-to-market" accounting) or when impaired.

The fair-value concept was established long before F.A.S. 157 and was referred to in more than 60 of the authoritative pronouncements that were being used by companies when F.A.S. 157 arrived. Many of those pronouncements contained guidelines for determining fair value that were similar to the guidelines in F.A.S. 157 but that were replaced by the new guidelines to improve consistency in application.

With that, conventional wisdom tells us that suspending F.A.S. 157 alone would not do away with fair-value accounting. Fair-value accounting would still be used—but without the new guidelines for determining fair value and without the new disclosures about fair value, which could add to, not reduce, the confusion that currently exists over what fair value is and what fair value means when used in financial reporting today.

The fair-value debate seems certain to continue, having potential implications for the fate of F.A.S. 157. But for now, F.A.S. 157 is holding. So in preparing their financial statements, companies should plan to continue to use the new guidelines (as clarified) for the fair values that are either required or permitted under other authoritative pronouncements.

SEC Commences Work on Congressionally Mandated Study on Accounting Standards

The Securities and Exchange Commission announced yesterday additional details on the process and initial steps that the SEC has undertaken to conduct a study on "mark-to-market" accounting, as authorized by Sec. 133 of the Emergency Economic Stabilization Act of 2008.

The study will focus on:The effects of such accounting standards on a financial institution's balance sheet

1. The impacts of such accounting on bank failures in 2008
2. The impact of such standards on the quality of financial information available to investors
3. The process used by the Financial Accounting Standards Board in developing accounting standards
4. The advisability and feasibility of modifications to such standards
5. Alternative accounting standards to those provided in FAS 157

The study is to be completed by Jan. 2, 2009.

FASB Issues Details of Clarified Position on Application of Mark to Market Rules

The FASb has released their detailed position clarifying the application of FAS 157. The full texis here: Proposed FASB Staff Position 157, Fair Value Measurements

Canary In the Fair Value Coal Mine

In his public blog at the AAO Weblog (Public), (which is required reading for anyone connected to the world of financial reporting) Jack Ciesielsk has one of his usual highly insightful, hard hitting posts, reproduced in its entirety below.

Take a moment away from the financial horror show you've been watching for weeks to contemplate an imaginary one: a coal mine disaster. After the dust settles and rescue efforts are mounted, a canary is lowered into the coal mine - and it promptly keels over. What to do?Well, if you're Congress the answer is obvious: you launch an investigation of the canary-breeding industry, because there must have been a genetic flaw that made the canary susceptible to the stress induced by the mine shaft's impure air.

That is the kind of logic being shown in the halls of Congress these days when it comes to figuring out the troubles roiling the capital markets. Fair value reporting in the financial system is the canary in the coal mine that informs investors when companies have made poor investment decisions and have dubious capital levels. If it's telling us unpleasant news about the state of things, then it can't be right. Order up an investigation of the canary-breeding industry, and that looks like what Alabama Congressman Spencer Bachus is intending to do in this letter to Representative Barney Frank.

It can't be that fair value reporting might actually be saying something about the financial condition of banks; there must be something wrong with fair value reporting. So let's investigate. It's conventional wisdom and political hay-making at its worst. It's testament to the low regard for investors held by Congress and the firms thirsty for their capital. Don't give them figures in balance sheets that show the state of the economic world as it IS; show investors the world the way we think it SHOULD be. That's a very dangerous idea that will probably be extended to other areas of financial reporting when other financial after-effects of current market instability begin to show.

[One possible area: pensions. While there are plenty of GAAP-permissible ways to minimize the funding level damage being currently wrought by markets, there are bound to be outcries over the fact that firms now show the unfunded balance of plans in their balance sheet more clearly than a couple years ago before Statement 158 went effective. The same kind of illogic applied to investigating and neutering fair value accounting could well be extended to pension and other benefits reporting. Let's hope not.]

To repeat one more time: fair value reporting is nothing new; firms have always had to report assets at what they're worth. Statement 157 did not extend fair value reporting to any new areas of balance sheets; it just gave investors more information about the integrity of fair values reported. And right now, integrity is pretty far out of fashion when it comes to the banking industry and Congress.

Gun to the Head of the International Accounting Standards Board?

European Union says to relax mark-to-market accounting rules

Banks in the European Union will be allowed to skirt an accounting rule blamed by critics for exacerbating the impact of the credit crunch and triggering fire sales of assets, EU president France said on Tuesday.

EU finance ministers agreed to change how the mark-to-market rule is applied in the third quarter so that European banks are treated in the same way as their U.S. competitors in the face of the worst financial crisis in 80 years.

Under U.S. accounting rules, banks in rare circumstances can move an asset from their trading book, where assets are valued on a mark-to-market basis, to their bank book, where assets are held to maturity and valued at cost.

The U.S. authorities formally encouraged this last week to ease the pain on banks facing an uphill task to recapitalise.

"In accounting, the American groups are authorised to transfer assets from their trading book, where they evaluate assets at mark-to-market," said Christine Lagarde, finance minister for France, which currently holds the rotating EU presidency. "We feel this method should also be allowed to apply to establishments in Europe," Lagarde said.

The move puts a gun to the head of the International Accounting Standards Board, an independent body that sets mandatory accounting rules used in over 100 countries, including the 27-nation EU. The IASB meets in London on Oct. 13-17 to consider aligning its mark-to-market rule with changes made in the United States.

EU diplomats said if the IASB did not make the change, the European Commission would make a formal proposal "within days" for EU ministers to adopt. "We can't leave European industry at a competitive disadvantage to their American counterparts," an EU official said.

The European Banking Federation called for the change last week, but some big investors have their doubts. "The Association of British Insurers believes that accounts should portray the situation facing companies as it is in reality, and the fair-value approach is important to this," the ABI said in a statement. "If we are to have faith in accounting standards, fair value should be applied when the going is hard as well as when it is fair," the ABI said.

The effective ultimatum from the EU to the IASB marks a further hardening of the bloc's attitude to a body that is seen by some EU policymakers as having influential law-making powers but too little public accountability.

The Global Fair-Value Fight

The political stampede against fair-value accounting is intensifying outside the United States as much as inside it.

The uproar has U.S. and global standard-setters scrambling to come up with new guidance, examples, and meetings to refute the notion that their guidelines for marking assets and liabilities to market have created the credit crisis. It has also prompted the International Accounting Standards Board to revisit its fair-value rules to make sure they don't stray too far from U.S. generally accepted accounting principles.

Moreover, the guidance from the SEC and FASB may have inadvertently made European companies — in a financial crisis of their own — nervous about their global competition.

French president Nicolas Sarkozy has reportedly been calling for the suspension of fair value in recent weeks and had been expected to address the issue during a summit with the leaders of Germany, Britain, and Italy this past weekend. In a 19-point document for fixing the economy released soon after, the leaders' directive toward accounting standard-setters addressed Europe's ability to compete globally. "We will ensure that European financial institutions are not disadvantaged vis-à-vis their international competitors in terms of accounting rules and of their interpretation," the leaders proclaimed in a joint statement.

They want European financial institutions to have the same ability as U.S. GAAP users to reclassify some assets in their trading book as "held to maturity." While noting that GAAP gives this allowance in rare instances, IASB says it is considering the concept.

Mark to Market--the Middle Ground

In its current cover story, “Let it Flow”, Barrons provides some insights into the middle ground on mark to market accounting.

"Ending the credit crisis will be highly unlikely without some type of accounting accommodation," according to Bridgewater Associates, the highly respected institutional money manager. "Because mark-to-market accounting on existing assets threatens bank capital today, it increases solvency concerns today, which raises funding costs and accelerates the need to sell assets today, which depresses the prices of those assets, which threatens capital and raises funding costs.

This cycle can be broken if banks communicated an accurate or conservative assessment of the fair value of their assets in the footnotes of their financial statements, thereby telling equity and bond investors what they need to know to value the company. But if these losses were accrued over the remaining life of the assets, thereby avoiding the immediate hit to the book value of capital, the selling pressure would be reduced, which might even allow prices to rise and reverse the cycle and improve sentiment. This seems pretty obvious without any knowledge of history, but history overwhelmingly confirms the need for such a change."

Bridgewater's proposal isn't the same as more radical suggestions to suspend so-called fair-value accounting. Indeed, ignoring current market values of assets would only heighten the lack of faith investors display for current book values.

"Many of the current requirements stem from the Savings & Loan crisis in the 1980s, when we learned that not knowing the real, current values of financial instruments held by financial institutions can be devastating when the bubble finally bursts and institutions are forced to close their doors," executives at the Center for Audit Quality wrote in a letter to the heads of the Fed, Treasury and SEC, urging them not to back off from mark-to-market standards.

But there should be a middle ground between simply accepting a historical cost and forcing assets that are not in default to be written down to current prices, notably those based on indexes of credit derivatives that frequently diverge from the prices of the actual underlying assets.

Last week, the SEC and the Financial Accounting Standards Board attempted to forge such a via media, or middle way. When no active market for a security exists, management may estimate values from market expectations of future cash flows and an appropriate risk premium, they wrote in a release. In other words, assets don't have to be valued based on current low-ball bids in a dysfunctional market. But the assets do have to reflect reasonable expectations of their payoff and risks, to satisfy investors and auditors. Does Arthur Andersen ring a bell?

THE KEY REASON TO limit mark-to-market losses is to preserve capital, whose conservation is the main constraint on the financial system.

Enron was the pit canary, but its death went unheeded
History is repeating itself as companies hide debt, blame the market for their failings and expect the taxpayer to pony up
Today's mark-to-market saga has a new twist. The SEC is facing political pressure to abolish mark-to-market accounting requirements for financial institutions, and some in Congress would like to dig mark-to-market's grave. Said in another way, now financial services firms may be allowed to deceive investors about their status, with the regulators blessing that deceit. (An aside here. Those who say mark-to-market should be abolished argue that because there is no market, firms are being forced to value these securities at artificially low levels. But there is no market precisely because firms aren't willing to sell at a price at which a reasonable investor would buy.)

Mark-to-market accounting stays, albeit 'clarified'
But we haven’t heard the end of this. The bailout law requires the SEC to conduct a study of mark-to-market accounting, assessing the effects on banks’ finances. One question Congress wants addressed is "the impact of such accounting on bank failures in 2008" -- in other words, are the bookkeeping rules hastening the demise of banks without good reason?

SEC gets power to suspend the mark-to-market accounting rule
The bill gives more heft to guidance the SEC issued on mark-to-market accounting on Sept. 30, says Michael Bopp, partner at law firm Gibson, Dunn & Crutcher. The SEC said companies are not required to mark assets to values that result from thinly trading markets.
But the real effect of the bill won't be known for some time, Bopp says. The SEC is required to study mark-to-market accounting and its role in recent bank failures and deliver results in 90 days.

Other Pathways Out of the Financial Crisis
A year ago, I heard warnings about the mark-to-market rules from Joe Robert, who runs a global real estate investment firm called J.E. Robert Cos. He argued that these rules were forcing financiers to sell into a declining market and assign rock-bottom valuations to assets that, if held to maturity, might be far more valuable.

Robert offers a simple example of what the mark-to-market regime has done: Imagine a street where the houses are all worth $1 million and each has a $500,000 mortgage. But a clause specifies that if a house's value declines to less than double the loan, the mortgage will go into default. Now, suppose one homeowner is forced to sell and has to accept a lowball offer of $600,000. Using mark-to-market rules, the lender would have to judge all the other homeowners technically in default, forcing them to raise additional cash or perhaps sell their homes. That's what has been happening in the financial world.

The Politics of Fair Value

The Economist previously published an excellent article on mark to market issues. This week they jumped in again with a rundown on how politics may affect accounting rules. here is their article followed by other excellent reading on the subject of fair value/mark to market.

Fair cop: Fair-value accounting becomes a political issue
IN FIRING their bazookas at the crisis, policymakers have blown holes in rules on everything from share trading to competition policy. It is therefore a miracle that fair-value accounting standards have not been hit too, in particular the requirement that banks “mark-to-market” most of their financial assets other than loans. These rules are deeply unpopular with many firms that have suffered losses and impaired capital positions. They would prefer to recognise losses in the traditional way—that is, slowly and when it suits them. More controversially, some argue the rules have created a vicious cycle of forced sales and falling prices.

The situation is more complex in Europe and other territories governed by the International Accounting Standards Board (IASB). The SEC is answerable to Congress, but there is no easy legal mechanism by which to turn up the heat on IASB, which is a private body. That has not stopped politicians from trying; Nicolas Sarkozy, the French president, reportedly sent a proposal to the European Commission that recommends suspending fair value, which he argues leaves bank balance-sheets “at the whim of speculators”. The commission may be receptive—Sir David Tweedie, IASB’s chairman, says that it mandated the use of international standards in Europe “with great courage and in total ignorance of the effects of its decision”.

Is it the beginning of the end for fair value? That seems unlikely. Standards setters will resist anything beyond tinkering with the rules. They will be supported by institutional investors and accounting firms. And anyway it now seems unlikely that suspending fair value would make much difference. The credit crunch has moved on, in the words of one banker, “from a mark-to-market phase to a more traditional phase of credit losses”. The recent forced sale of Wachovia, America’s fourth-largest commercial lender, reflected concerns about its loans, which banks almost always carry using historic-cost rules, not fair value. If mark-to-market accounting really does react too fast to the market, politicians may have responded too late.

Have We Learned Nothing?
Post-Enron regulations were supposed to hold companies and markets accountable. Author Bethany McLean explains what went wrong—again.
Eight years after the Enron debacle, Wall Street was supposed to have learned its lesson about creative accounting, excessive risk-taking and corporate greed. Government regulators and ratings agencies were supposed to be chastened, too. Instead, the rules never really changed, and we are now facing far deeper crises, according to financial author Bethany McLean. What's worse, she says, is that regulators are now encouraging accounting practices similar to those that contributed to Enron's fall.

NEWSWEEK: Congressional leaders say the bailout bill the Senate passed has more transparency about how the industry will spend taxpayers' $700 billion. But at the same time, it appears the government may be acting to reduce transparency, by banning short-selling and relaxing some accounting rules regarding how banks value their mortgage assets. It seems " Alice in Wonderland " -like.Bethany McLean: I think it's exactly "Alice in Wonderland." The notion that short sellers are to blame: it's a total reversal of cause and effect. They short a stock because they suspect the company is unsound—they do not cause the company to be unsound. Show me the gun that short sellers held to Wall Street executives that made them buy bad mortgages. And there's probably an argument to be made that the [Dow’s 777.68-point] decline would have been less if short sellers had been in the market because they step in and buy stocks when they cover their short positions.

Sarkozy seeks more flexibility on accounting rules
The pressure on regulators and rulemakers to ease "fair value" accounting standards in an effort to help end the financial crisis has been intensified by politicians. Nicolas Sarkozy, French president, is to urge his European counterparts this week to back changes that would introduce more flexibility in the accounting rules, while David Cameron, leader of the British opposition, yesterday said the rules had made the crisis worse and needed to be addressed.

Mr Sarkozy is seeking to give political momentum to EU efforts to tighten financial market rules after France became yesterday the latest European government to use public money - €3bn ($4.21bn, £2.37bn) of it - to bail out Dexia, the Belgian-French banking group. The president called a "crisis meeting" of French banks and insurers to discuss the financial turmoil.

In Defense of FAS 157
With the appropriate risk adjustments and illiquidity adjustments being made as instruments are purchased, the rescue plan can safeguard the government’s (and taxpayer’s) interest, while insuring the stability of the financial system. All of this doesn’t require rescinding FAS 157.

Buffet Advisor: Leave Mark to Market Accounting Alone

"Mark-to-market" accounting fight goes down to the wire
Longtime advisor to billionaire Warren Buffett Robert Denham is a partner at L.A.-based law firm Munger, Tolles & Olson. "We believe that once Congress starts setting accounting standards through its political process, the integrity of U.S. accounting standard-setting and the credibility of U.S. financial reporting will be dangerously compromised," Denham wrote in a letter to House Financial Services Committee Chairman Barney Frank (D-Mass.).

"Suspending the proper accounting of this paper is the refuge of cowards," financial blogger Barry Ritholtz wrote in a strong defense of mark-to-market on Wednesday. "It reflects a refusal to admit the original error, it hides the mistake, and it misleads shareholders. I find it to be a totally unacceptable solution to the current crisis."

The language in the bailout bill passed by the Senate on Wednesday gives the SEC the authority to suspend mark-to-market accounting for any type of security, but doesn’t require the agency to act. That was the same watered-down wording that was in the first House bailout bill -- wording that some anti-mark-to-market conservatives cited as one of the key reasons they voted against the bill.

Mark-to-market madness
Dominic D’Alessandro is chief executive of Manulife Financial, the second-largest life insurance company in North America and the fourth largest in the world.

I just got an idea. I’m going to go on a crusade to expose the fallacy of these accounting and reporting rules that we’re subjecting our businesses to. It just absolutely makes no sense. When the book on this decade or so of finance is written there’ll be many chapters, but probably half the book will be about the financial reporting and accounting practices that industry and the business generally have been saddled with.

Now, I’ve no doubt that the subprime and all these other problems had to be flushed out. But did they need to be flushed out with quite this speed. And when you do something as mammoth as this, as complex as this in haste, you’re going to throw out a lot of babies with the bath water. No one knows what the real value of some of those asset pools are. But in our haste to try to get there, we’ve confused the market. People have no confidence in anything. And I’m not sure that in the end, we’re going to be all the better for it. I think these kind of accounting practices are wrong theoretically. They’re wrong operationally. They make no sense for anybody.

Posting Ugly Marks
"Opponents of dropping mark-to-market do not want banks to have discretion in marking paper but they want them to mark to a market that does not exist," writes Robert Brusca, economist at Fact and Opinion Economics. "The market they have tethered banks to is so thin with bid-offer spreads so wide that the parameters for value are elusive. So which fantasy is worse: the one foisted on banks that is bankrupting them, or the one the banks guess at looking to the future — with regulators looking over their shoulder?"

But Barry Ritholtz, chief investment strategist at Fusion IQ, argues that these banks made their bed when they decided to "bypass the broad, deeply traded traditional markets (Equities, Fixed Income, Commodities and Currency) and instead create new markets for new products." What has happened, he says, is that the "net result was a flawed system of garbage paper, with too little room at the exits in case of emergency."

Within this context it is important to note that any sale of these products — such as a sale made by Merrill Lynch earlier in the year at 22 cents, or a purchase by the U.S. Treasury Garbage Barge Trust — will effectively value these assets, perhaps at a level below what the banks expect. Once that happens, the companies will have no choice. Citigroup wrote down $10 billion to $20 billion per quarter for several quarters running; had they not done that, would they face a write-down of $70 billion to $80 billion if it all came at once? And what kind of psychological shock would that cause?

Mark-to-Market Accounting: What You Should Know
What is mark-to-market accounting? Loans and securities make up the bulk of a bank's assets. Thus, the method you use to establish values for these securities when preparing your financial statements affects shareholders' equity. (Shareholders' equity = assets – liabilities, remember?) That, in turn, has an effect on a bank's profit and loss statement.

Mark-to-market accounting sets the value of (or "marks") the assets on your balance sheet to reflect their market sale prices. In theory, that all sounds nice and clean. In practice, things get a little messier.
All the way down to Level 3 hell Not all securities are as liquid as Microsoft shares, for which anyone can look up the price on the Internet at any given moment. Some mortgage securities may not even trade once a day; what prices will you use for those?

To address this, there is a hierarchy of assets, with a set of guidelines for each:
Level 1 assets have market prices.
Level 2 assets don't have market prices; they're marked at fair value based on a model. The model is fed with inputs for which there are market prices (prices of similar securities, interest rates, etc.).
Level 3 assets don't have available market prices for the model inputs, forcing the people preparing the financial statements to make assumptions about those inputs' values.

Mark-to-market what?
Mark to market

Wolves Circle Mark to Market

Momentum Gathers to Ease Mark-to-Market Accounting Rule
Critics of the proposed changes to the "mark to market" rules say gains created by easing the rules would be illusory and would delay resolving genuine doubts about the value of mortgage assets that has caused the recent crisis in confidence. As of Wednesday, the industry appeared to be gaining support for easing the rules, in part because some lawmakers believe it could cut the cost of a potential financial-industry bailout.

Banks and a diverse coalition of lawmakers scored a victory on the issue Tuesday, when the SEC and Financial Accounting Standards Board issued "clarification" to the mark-to-market accounting rules.

The SEC and FASB stopped short of bowing to pressure for a complete suspension of fair-value accounting. But that pressure could intensify when the rescue bill reaches a House vote. Financial-industry lobbyists' work on the financial-markets bill has given them another opportunity to press their case through allies in Congress, many of whom are big recipients of campaign money from the industry. More than 60 lawmakers -- all but five of whom voted against the bill Monday -- wrote to the SEC Wednesday, urging the regulator to immediately suspend the mark-to-market rule.

Accounting firms and investors groups put up a united front Wednesday in opposition to the changes. "Suspending fair value accounting during these challenging economic times would deprive investors of critical financial information when it is needed most," said the Council of Institutional Investors, Center for Audit Quality and CFA Institute in a joint statement. "It would not help solve our economic difficulties."

Republican presidential candidate John McCain, in a statement, praised the SEC clarification, saying, "There is serious concern that these accounting rules are worsening the credit crunch, making it difficult for small businesses to stay afloat and squeezing family budgets."

"We have all seen what can happen when institutions are allowed to mask huge losses in asset values," PricewaterhouseCoopers LLC Chairman Dennis Nally wrote in a letter to Congress. Suspending the rules, he said, could "plant the seeds for the next crisis."

That hasn't swayed fiscal conservatives in the House, who cite the need to suspend mark-to-market rules in explaining their opposition to the rescue bill. "One of the best reasons to fire [SEC Chairman] Chris Cox is the refusal to deal with the problem of mark to market," Rep. Darrell Issa (R., Calif.) said on MSNBC this week. "You do that, and you put trillions of dollars back into the lending pool. ... It's a tool that's available [to] the SEC, the Fed, the FDIC and the Treasury secretary, and they're not using it."

Is Debate Over Mark-to-Market Just a Waste of Time?
In an excellent post on the Curious Capitalist blog, Justin Fox makes a point that may make the whole debate moot. “Investors and regulators and reporters and corporate executives need to learn not to take any financial reporting numbers, whether marked-to-market or not, at face value. The health of a bank or any corporation can never be adequately measured by a single bottom-line number. Understanding the assumptions and uncertainties inherent in accounting numbers is crucial to understanding how to use them,” he writes.

In the current environment, everyone seems to be taking Fox’s advice. That may be one reason why these markets are frozen in the first place. Even if mark-to-market rules are suspended immediately, it won’t change the makeup of a company’s balance sheet. Investors have decided that these assets are toxic and no matter how a bank accounts for them in its books, that sentiment isn’t likely to change unless investors see some proof that the instruments are actually undervalued. So far, there’s been little to suggest otherwise.

Steve Forbes: Ease Mark-to-Market Rules
Famed business magazine publisher Steve Forbes says there's a relatively simple way to help solve the financial mess on Wall Street — ease mark-to-market accounting rules. "Short-term assets should not be given arbitrary values unless there are actual losses. The mark-to-market mania of regulators and accountants is utterly destructive. It is like fighting a fire with gasoline," Forbes wrote in the Oct. 6 issue of Forbes magazine.

Forbes recommends that investors think of the mark-to-market mess by using the following metaphor: A person buys a house for $250,000 and then takes out a $250,000 fixed-rate mortgage for 30 years. The person's income is adequate to make the monthly payments. "But under mark-to-market rules, the bank could call up and say that if your house is not sold immediately, it would fetch maybe $200,000 in such a distressed sale. The bank would then tell you that you owe $250,000 on a house worth only $200,000 and to please fork over the $50,000 immediately or else lose the house," said Forbes.

"Absurd? Obviously. But that's what, in effect, is happening today. Thus, institutions with long-term assets are having to drastically reprise them downward. And so the crisis feeds on itself."

Making the case for mark-to-market rules
There's a segment of the political and banking world that wants to toss out mark-to-market accounting rules, on the logic that they create those nasty, inconvenient writedowns. There's a growing constituency telling regulators and politicians to leave mark-to-market accounting rules just as they are, thank you very much.

There is no debate over the real financial pain that can result when the value of a illiquid, complex security has to be pegged in a market plagued by unprecedented chaos. But the alternative to pain is denial, or worse.
Trust me accounting – allowing banks and other financial players flexibility in setting the values of securities they hold - isn't likely to solve the credit crunch. It's just going to make it worse. It creates an enviorment rife with uncertainty, and open to fraud.

Accounting Mayhem at the Wall Street Journal

After a couple of weeks of singing from the investment banks’ songbook on mark to market/fair value accounting, the Wall Street Journal now does a gigantic triple backward flip flop and says accounting is meaningless:

Mark to Mayhem?
Because of all this, the regulatory state finds itself in a somewhat absurd position -- its own rules could render many financial institutions insolvent in a manner inconvenient to the state.
We choose the adjective advisedly. These institutions are guaranteed by the federal government, implicitly or explicitly, so questions of solvency are largely academic--except as to the value of their equity. In fact, much of the ferocious argument over mark-to-market really is a political battle between CEOs and short sellers for control of the stock price. Washington wishes they'd just shut up before savers and lenders join the argument -- because, in present circumstances, we'd call that a "bank run."

Then there's a third group on the sidelines who attribute religious or ethical superiority to mark-to-market. Their sentiments are simply misplaced. Mark-to-market and its alternatives all have their uses -- a rose by any other name. A savvy analyst looks at them all with the same gimlet eye.

But usefulness is not what we're talking about here -- we're talking about a regulatory trap for equity, created as an unintended consequence of a well-meaning accounting rule. Short sellers see this trap and try to exploit it. Uninsured lenders and depositors see it and worry about not getting paid back. That fear is why banks have all but stopped lending to each other -- and why Henry Paulson launched his plan, and why the SEC made its move yesterday.

Accounting straddles the real and unreal, so it's hard to guess how much difference getting rid of mark-to-market might really make. The only way to find out is to try.

A mere accounting rule change won't reduce foreclosures or raise home prices -- then again, if spared drastic writedowns, banks might be more willing to lend, raising home prices and reducing foreclosures.

A mere accounting rule can't alter the underlying economics of a lending business -- then again, no longer worried about insolvency-by-accountant, investors might discover new confidence to inject capital and improve the underlying economics of a lending business.

No accounting rule is worth $700 billion. Then again, the essence of the Paulson plan was to raise the value of bank assets to help banks escape the regulatory equity trap. Does that mean we can change an accounting rule and save Congress from having to appropriate $700 billion?

Other views—
In the mainstream media
The accounting rule you should care about
A New Rule Change That Could Hurt Taxpayers
Why get a bailout when you can massage the books?
Clarification of accounting rule sparks debate
In blogs
Moving The Foul Pole: The Mark-To-Market Scandal
Changing the rules on bank accounting, the fix is in
Fair Value Follies
Fair Value Follies 2
FASB and SEC Make Nice-Nice
SEC: Why Don't You Just Tell Us What You Want The Value To Be?

SEC, FASB Clarify Fair Value Accounting

SEC Office of the Chief Accountant and FASB Staff Clarifications on Fair Value Accounting

This seems like just plain common sense and a standard application of the rules. But it serves the purpose of starting the process of reconciling GAAP to the recently expressed views of investment bankers and politicians.

Excerpts:

Can management's internal assumptions (e.g., expected cash flows) be used to measure fair value when relevant market evidence does not exist?
Yes.

How should the use of "market" quotes (e.g., broker quotes or information from a pricing service) be considered when assessing the mix of information available to measure fair value?
Broker quotes may be an input when measuring fair value, but are not necessarily determinative if an active market does not exist for the security.

Are transactions that are determined to be disorderly representative of fair value? When is a distressed (disorderly) sale indicative of fair value?
The results of disorderly transactions are not determinative when measuring fair value.

Can transactions in an inactive market affect fair value measurements?
Yes.

What factors should be considered in determining whether an investment is other-than-temporarily impaired?
In general, the greater the decline in value, the greater the period of time until anticipated recovery, and the longer the period of time that a decline has existed, the greater the level of evidence necessary to reach a conclusion that an other-than-temporary decline has not occurred.

Commentary:

S.E.C. Move May Relax Asset Rule
How to Start the Healing Now
Financial crisis: SEC cheers finance companies with mark-to-market ...
Focus turns to 'mark to market' accounting rules
Understanding the Significance of Mark-to-Market Accounting
Stop Treating Wall Streeters Like Villains and Resolve This Crisis