Did Fair Value Accounting Play a Role in the Credit Crisis?

The Securities and Exchange Commission (SEC) just released its voluminous report totaling more than 200 pages that investigated whether fair value accounting was to blame for any or all of the credit crisis and financial dislocations over the past year. The SEC concluded that fair value accounting "did not appear to play a meaningful role" in the 25 bank failures that have occurred this year or the tumult at collapsed investment banks."

The next day a group of insurers say just the opposite in their report.

"The application of fair value accounting measurements to an inactive, illiquid, and disorderly market for structured credit products helped fuel the worldwide credit crisis, an organization of major insurers and reinsurers told the U.S. Financial Accounting Standards Board (FASB)....that while the organization does not believe that fair value measurements caused the global credit crisis, "unreliable, and non-transparent fair value measurements served as a powerful accelerant."

Comments

[jpeak:]

This is a pointless he-said she-said article. Why post? I am far more interested in hearing alternative solutions to FMA that could be leveraged going forward that listening to people whine about how much the current system sucks cuz they lost money. So what are the insurers saying?.. They should get to arbitrarily suspend the rules as they please?

Jan 05 08:21 PM

[Anthony Alfidi:]

The great irony is that fair value accounting can help prevent crises like this in the future. Banks should hesitate to issue instruments that aren't liquid or transparent if they know they will have to value them conservatively on their balance sheets.

Jan 06 01:24 AM

[Moon Kil Woong:]

The lack of any accounting (off balance sheet Base I accounting) played a part not fair value accounting. The simple act of having to admit to your losses sometime doomed banks to a series of unfortunate events (those that happened before that you hid under a blanket).

What the US needs is complete transparency. It will hurt but that's the only way you can quickly go from a dark room to seeing blue sky again. Of course, you could do it slowly and real with a nice 20 year recession if you want while singing David Bowie's "I think I'm turning Japanese" song.

Jan 06 02:57 AM

[petyaczar:]

SO called fair value accounting = mark to market is the root cause of this financial crisis as MtoM has made ALL balance sheets unstable and all lenders and borrowers suspect in terms of their future financial stability "Credit worthiness"

MtoM is like a bad gas gauge that randomly provides incorrect readings from moment to moment. What does a reasonable driver do in that situation to avoid running out of gas ($)? He either fixes the gas gauge, or he pulls in to fill up at every opportunity to avoid running out of gas.

Hence everyone if hoarding cash, and no one is lending money.

MtoM must be killed, drive a stake thru its heart, cut off the head, and burn the parts. FOREVER. Then you will see credit markets open up and the stock market explode to the upside.

The G/D polticians caused this problem with Sarbanes Oaxley and the 2004 credit act. Let's return to the accounting principles that had served us so well since the 1940's. an lets reinstate the uptick rule on short sales, and increase margin requirements to 50% on all commodities futures trading = just as it is for stocks.

IMO

IMO

Jan 06 09:03 AM