After a full year of contemplation and consultation, the FASB eliminated qualified special purpose entities (QSPEs).
QSPEs allow banks and other financial institutions and companies to hold asset-based securities off-balance sheet. This move will not likely have a significant impact on earnings in the banking sector, but it will affect capital levels at institutions that sold mortgage and other loans into such securities.
The previously off-balance sheet assets will now show up on the balance sheet at the start of 2010 for most institutions.
While there may be minimal differences in banks' earnings, the impacts on balance sheets will be more significant, possibly requiring banks to increase reserves.
Banks were initially upset by the timing of the initial proposal, which was put off after objections from the American bankers’ Association. The FASB says ABA lobbying will not change the current implementation date.
The ABA continues to lobby for changes to FASB's mark-to-market accounting rules and other than temporary impairment rules. The banks feel that mark-to-market accounting is not the best measurement for many transactions, advocating that the current approach works for assets expected to be sold, but not for assets that are expected to be held, among other issues. Banks have claimed for years that mark-to-market rules force them to place unrealistically low values on illiquid or otherwise difficult to trade assets (known in mark-to-market accounting terms as "Level 3 Financial Instruments".)
Mark-to-market accounting is under increasingly fierce attack by bankers who are lobbying hard for U.S. Congress to suspend or repeal mark to market rules. Bankers blame the rules for the current financial crisis.
Recently the FASB issued changes to accounting rules that would allow looser mark to market accounting. The changes has sparked opposition to the changes from consumer and investor groups that who are advancing their previously expressed arguments that the rules give management (banks?) too much freedom in valuing assets in distressed or illiquid markets.
Opposition comes from such places as the Consumer Federation of America, the CFA Institute and the FASB's Investors Technical Advisory Committee. The opposition may also have an impact on proposed changes to financial institutions' regulatory capital levels, which the banks claim are needed to ease the existing credit crunch and to avoid future credit messes like we have had in the past year.
Showing posts with label bailout. Show all posts
Showing posts with label bailout. Show all posts
Friday, July 10, 2009
Thursday, March 26, 2009
Arthur Levitt: FASB Caved in to Banks and Political Pressure
Arthur Levitt, former chair of the SEC doesn't like the FASB/IASB changes to mark to merket rules. Some of his comments:
The FASB's proposal goes against what we know investors prefer: Stronger rules for the reporting of changes in the values of investments in income statements. Under the proposed rule, no matter how toxic the investment, whether it's a penny stock or the bonds of a government ward such as AIG, companies can choose to largely ignore the fundamental reasons behind the investments' decline. All that companies have to do is say they don't intend to sell those investments until their value rebounds.
Such a subjective judgment is bound to decrease investor confidence in reported income.
In a strange twist of fate, the FASB's proposals may create even greater opportunities for short sellers who are adept at digging into numbers that do not tell the whole story.
The real scandal here is not the decision by the FASB, rather it is how the independence of regulators and standard-setters is being threatened. This isn't just about the income statements of banks. It's about further eroding investor confidence, precisely at a moment when investors are practically screaming for more protection.
In seeking to protect its independence, the FASB has surrendered some of it in the bargain.
Independence from public pressure has a value, and when you give some of it away, you've lost something that takes years to rebuild.
The rule change agreed to by the FASB on Tuesday followed only one public meeting on this topic, and the board is giving investors just two weeks to comment, with a final vote the next day. This is a rush job.
The FASB should rethink its approach to these rules.
Above all, the Securities and Exchange Commission should take a firm stand on the side of investors and vigorously resist all political efforts to reduce the independence of financial rule-making agencies and boards.
Investors once believed that U.S. markets were sufficiently protected from political pressure and manipulation by a system of interlocking independent agencies and rule-making bodies -- some government-run, some not. That system is being dismantled, piece by piece, by political jawboning and rushed rule rewrites. Now, investors find themselves with fewer protections and weakened.
Full article here.
Thursday, October 2, 2008
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.
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.
Wednesday, October 1, 2008
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:
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?
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."
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.
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
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
Tuesday, September 30, 2008
Thirsty for Changes to Mark to Market?
Would suspending mark-to-market rule solve the financial crisis?
Kevin Kersten at bloggingstocks provides this amusing example:
Let me give a silly but simple illustration. If you have 20 one dollar bills in your wallet, we would all agree you have a net worth of $20. Thirsty Bob also has one dollar bill in his wallet and walks into the break room and wants to buy a Coke. Soda in the machine costs 50 cents, but it only takes quarters. Thirsty Bob asks if anyone has change and they all say no. Sam says he has only two quarters and will trade Thirsty Bob -- who is really thirsty -- two quarters for a dollar. Thirsty Bob quickly agrees to take Sam up one his offer in order to get the Coke now. Bob knows that two quarters for a dollar is a bad deal, but he is takes the deal anyway.
According to mark-to-market accounting, you, with your 20 dollar bills, now have a net worth of $10. Even though you are still holding the exact same 20 one dollar bills you held in your hand when you entered the room and even though you did not trade with anyone else in the room, the current public market in the room for $1 bills is 50 cents. If each of those $1 bills is worth two quarters, your net worth is only 40 quarters, or $10. You must evaluate your net worth based on the current market. You are smart enough to know that the one dollar bills are really worth four quarters at the bank down the road, but mark-to-market accounting will not allow you to use this "long term" evaluation method.
This, in essence, captures the problem of the current loans crisis. One dollar bills are the mortgages nobody is willing to buy. Banks must evaluate them at the depressed rates they occasionally trade at and everyone is feeling poorer.
Kevin Kersten at bloggingstocks provides this amusing example:
Let me give a silly but simple illustration. If you have 20 one dollar bills in your wallet, we would all agree you have a net worth of $20. Thirsty Bob also has one dollar bill in his wallet and walks into the break room and wants to buy a Coke. Soda in the machine costs 50 cents, but it only takes quarters. Thirsty Bob asks if anyone has change and they all say no. Sam says he has only two quarters and will trade Thirsty Bob -- who is really thirsty -- two quarters for a dollar. Thirsty Bob quickly agrees to take Sam up one his offer in order to get the Coke now. Bob knows that two quarters for a dollar is a bad deal, but he is takes the deal anyway.
According to mark-to-market accounting, you, with your 20 dollar bills, now have a net worth of $10. Even though you are still holding the exact same 20 one dollar bills you held in your hand when you entered the room and even though you did not trade with anyone else in the room, the current public market in the room for $1 bills is 50 cents. If each of those $1 bills is worth two quarters, your net worth is only 40 quarters, or $10. You must evaluate your net worth based on the current market. You are smart enough to know that the one dollar bills are really worth four quarters at the bank down the road, but mark-to-market accounting will not allow you to use this "long term" evaluation method.
This, in essence, captures the problem of the current loans crisis. One dollar bills are the mortgages nobody is willing to buy. Banks must evaluate them at the depressed rates they occasionally trade at and everyone is feeling poorer.
Monday, September 29, 2008
Mark to Market...the Song that Never Ends
More and more on mark to market accounting. Some controversial views are expressed by various writers in the sources noted below and in other sources quoted in earlier postings. But as an accountant in the post-Enron world, it's tough to understand why anyone would want less informative or less transparent accounting disclosure. It seems counter-intuitive that less conservative accounting would help financial markets. None of the arguments made so far present a clear picture as to why any financial institution has been harmed by mark-to-market rules--what we have seen is mostly dubious scare tactics along the lines of "mark-to market is the next plague, so we need to get rid of it." We need bankers to be more specific about this if they want to justify new or different rules.
Suspend Mark-To-Market Now! By Newt Gringrich
Reform or Bust: Because existing rules requiring mark-to-market accounting are causing such turmoil on Wall Street, mark-to-market accounting should be suspended immediately so as to relieve the stress on banks and corporations. In the interim, we can use the economic value approach based on a discounted cash flow analysis of anticipated-income streams, as we did for decades before the new mark-to-market began to take hold. We can take the time to evaluate mark-to-market all over again. Perhaps a three-year rolling average to determine mark-to-market prices would be a workable permanent system. It is not widely understood that the adoption of mark-to-market accounting rules is a major factor in the liquidity crisis which is leading companies to go bankrupt. But it is destructive to have artificial accounting rules ruin companies that would have otherwise survived under previous rules. Also:The Congress should repeal Sarbanes-Oxley, which failed to warn of every single bankruptcy!!
Mark to Market Accounting: Kill It Before It Eats Us Alive
However, mark to market rules distort financial results and business decisions under the false cloak of conservatism. The rules make little sense, produce inconsistent results, lack a basis in reality and provide lots of room for abuse.
FASB, SEC Discuss Fair Value-Standards
The FASB is in discussions with the U.S. Securities and Exchange Commission about whether additional guidance on fair value accounting rules is needed, according to a person familiar with the matter. SEC spokesman John Nester said the SEC is "working closely with U.S. and international regulators and standard setters on the issues related to fair value." It was unclear whether the SEC and FASB would issue guidance before the end of the third quarter, which ends on Tuesday.
Suspend Mark-To-Market Now! By Newt Gringrich
Reform or Bust: Because existing rules requiring mark-to-market accounting are causing such turmoil on Wall Street, mark-to-market accounting should be suspended immediately so as to relieve the stress on banks and corporations. In the interim, we can use the economic value approach based on a discounted cash flow analysis of anticipated-income streams, as we did for decades before the new mark-to-market began to take hold. We can take the time to evaluate mark-to-market all over again. Perhaps a three-year rolling average to determine mark-to-market prices would be a workable permanent system. It is not widely understood that the adoption of mark-to-market accounting rules is a major factor in the liquidity crisis which is leading companies to go bankrupt. But it is destructive to have artificial accounting rules ruin companies that would have otherwise survived under previous rules. Also:The Congress should repeal Sarbanes-Oxley, which failed to warn of every single bankruptcy!!
Mark to Market Accounting: Kill It Before It Eats Us Alive
However, mark to market rules distort financial results and business decisions under the false cloak of conservatism. The rules make little sense, produce inconsistent results, lack a basis in reality and provide lots of room for abuse.
FASB, SEC Discuss Fair Value-Standards
The FASB is in discussions with the U.S. Securities and Exchange Commission about whether additional guidance on fair value accounting rules is needed, according to a person familiar with the matter. SEC spokesman John Nester said the SEC is "working closely with U.S. and international regulators and standard setters on the issues related to fair value." It was unclear whether the SEC and FASB would issue guidance before the end of the third quarter, which ends on Tuesday.
Friday, September 26, 2008
Mark to Market Accounting Consequences of Bailout Explained
Excellent article here on how mark to market accounting affects the current investment bank bailout proposal.
Also, in a reaction to the financial crisis, the International Accounting Standards Board has called a special meeting to discuss the IFRS rules on accounting for financial instruments, which is where the fair value and mark to market accounting rules exist.
Also, in a reaction to the financial crisis, the International Accounting Standards Board has called a special meeting to discuss the IFRS rules on accounting for financial instruments, which is where the fair value and mark to market accounting rules exist.
Former SEC Bosses: Keep, Expand Fair Value Accounting
In an editorial "How to Restore Trust In Wall Street" in the Wall Street Journal, Arthur Leavitt, a former SEC chair and and Lynn Turner, a former SEC chief accountant make the case for more and better, not less, fair value accounting .
- Banking and financial services trade groups are aggressively lobbying the SEC to suspend the mark-to-market, or fair-value, accounting standards, claiming that fair-value accounting standard has distorted banks' balance sheets, and has contributed to the market volatility.
- On the contrary, that gets things backward--it is accounting sleights-of-hand that hid the true risk of assets and liabilities these firms were carrying, distorted the markets, and caused investors to lose the confidence necessary for markets to function properly.
- Restoring public trust requires better quality, accuracy, and relevance in financial reporting and expanding, not reducing fair value reporting of the securities positions and loan commitments of all financial institutions.
Only fair value accounting brings transparency to the market and determines whether or not a financial institution has sufficient capital and liquidity to justify receiving loans and capital. - Contrary to what the critics claim -- fair value is not liquidation value. It does not reflect ultimate settlement amounts, but the current value in arms-length transactions. It is an accurate reflection of the value of an asset or cost of a liability, and what taxpayers should pay for assets.
- Those who blame fair-value accounting for the current crisis are shooting the messenger. Fair value does not make markets more volatile; it just makes the risk profile more transparent.
- Blame lies with Lehman, AIG, Fannie Mae, Freddie Mac and others who made poor investment and strategic decisions and took on dangerous risks--blame should not be placed on the process by which the market learned about the them.
- Tough medicine must be taken in order to vastly improve financial reporting, bring transparency to the markets.
Tuesday, September 23, 2008
Wall Street says Accounting Caused Meltdown
It's obvious that lobbyists for Wall Street firms are taking a hard line of suspending or revising mark to market rules (for a review of the basics go here). The WSJ has several articles a day over the past few days citing the FAS 157 rules as the villains of the current meltdown. The Washington Post summarizes some of their comments in the excerpt below. Accountants quoted are generally on the defensive. University profs are divided on the issue.
Wall St. Points to Disclosure As Accounting Rule Cited in Turmoil
Carrie JohnsonWashington Post September 23, 2008
Wall Street executives and lobbyists say they know what helped push the nation's largest financial institutions over the edge in recent months. The culprit, they say, is accounting. Lynn E. Turner, a former SEC chief accountant, said he remembered fielding questions about the accounting provision six months ago from lawmakers on Capitol Hill. "What the banks are telling everyone is that the accounting has caused the problem," Turner said. "The only thing fair-value accounting did is force you to tell investors you made a bunch of very bad loans." "[Mark to market rules are] intended to be more or less for orderly markets," said Dennis R. Beresford, an accounting professor at the University of Georgia. "But we don't have orderly markets these days. It's not so much that mark to market has people complaining, but marking to a particular market. Today it's more kind of fire-sale prices."
Martin Sullivan, chief executive of AIG, decried fair-value accounting in a February conference call with investors and called for regulators to make changes after AIG took an $11 billion write-down this year. Joe Norton, a spokesman for AIG, declined to comment yesterday.
Arizona Sen. John McCain, the GOP presidential candidate, mentioned fair-value accounting as a problem in a recent stump speech.
Banks also have been fighting their auditors, some of which have reasoned that downmarket conditions have persisted for so long that assets are no longer "temporarily impaired" but now require write-downs and capital infusions. Banking trade association officials are scheduled to meet with SEC regulators this week to discuss the issue, which could prompt some banks to attract new capital to meet regulatory requirements. "The accounting rules and their implementation have made this crisis much, much worse than it needed to be," said Ed Yingling, president of the bankers' association. "Instead of measuring the flame, they're pouring fuel on the fire."
The odds of a wholesale regulatory reversal in the near term, however, are slim, according to two sources briefed on the process, because a shift away from fair-value accounting would only intensify trouble with pricing complex assets in an unruly market. The sources spoke on condition of anonymity because they were not authorized to speak publicly about the matter.
"It is extremely unlikely they are going to back off of market-value accounting in the midst of a crisis," said a financial services policy expert with long government experience. "When things stabilize, I guarantee you that you're going to see a revised procedure."
J. Edward Ketz, an accounting professor at Pennsylvania State University, says he "doesn't buy" the argument that fair-value accounting is a root cause of the problems. Executives never complained about mark-to-market accounting standards when they helped banks post huge gains on derivative investments during the economic boom, or when fair-value accounting for stock options produced tax benefits, Ketz said. "If anything, I think that market-value accounting has helped to bring the problems to a head earlier and with less damage, than if market-value accounting hadn't been applied," said Charles W. Mulford, an accounting expert at the Georgia Institute of Technology.
Wall St. Points to Disclosure As Accounting Rule Cited in Turmoil
Carrie JohnsonWashington Post September 23, 2008
Wall Street executives and lobbyists say they know what helped push the nation's largest financial institutions over the edge in recent months. The culprit, they say, is accounting. Lynn E. Turner, a former SEC chief accountant, said he remembered fielding questions about the accounting provision six months ago from lawmakers on Capitol Hill. "What the banks are telling everyone is that the accounting has caused the problem," Turner said. "The only thing fair-value accounting did is force you to tell investors you made a bunch of very bad loans." "[Mark to market rules are] intended to be more or less for orderly markets," said Dennis R. Beresford, an accounting professor at the University of Georgia. "But we don't have orderly markets these days. It's not so much that mark to market has people complaining, but marking to a particular market. Today it's more kind of fire-sale prices."
Martin Sullivan, chief executive of AIG, decried fair-value accounting in a February conference call with investors and called for regulators to make changes after AIG took an $11 billion write-down this year. Joe Norton, a spokesman for AIG, declined to comment yesterday.
Arizona Sen. John McCain, the GOP presidential candidate, mentioned fair-value accounting as a problem in a recent stump speech.
Banks also have been fighting their auditors, some of which have reasoned that downmarket conditions have persisted for so long that assets are no longer "temporarily impaired" but now require write-downs and capital infusions. Banking trade association officials are scheduled to meet with SEC regulators this week to discuss the issue, which could prompt some banks to attract new capital to meet regulatory requirements. "The accounting rules and their implementation have made this crisis much, much worse than it needed to be," said Ed Yingling, president of the bankers' association. "Instead of measuring the flame, they're pouring fuel on the fire."
The odds of a wholesale regulatory reversal in the near term, however, are slim, according to two sources briefed on the process, because a shift away from fair-value accounting would only intensify trouble with pricing complex assets in an unruly market. The sources spoke on condition of anonymity because they were not authorized to speak publicly about the matter.
"It is extremely unlikely they are going to back off of market-value accounting in the midst of a crisis," said a financial services policy expert with long government experience. "When things stabilize, I guarantee you that you're going to see a revised procedure."
J. Edward Ketz, an accounting professor at Pennsylvania State University, says he "doesn't buy" the argument that fair-value accounting is a root cause of the problems. Executives never complained about mark-to-market accounting standards when they helped banks post huge gains on derivative investments during the economic boom, or when fair-value accounting for stock options produced tax benefits, Ketz said. "If anything, I think that market-value accounting has helped to bring the problems to a head earlier and with less damage, than if market-value accounting hadn't been applied," said Charles W. Mulford, an accounting expert at the Georgia Institute of Technology.
Subscribe to:
Posts (Atom)