David Enke

Deficiencies in Fair Value and Mark-to-Market Accounting

PT53, thanks for reading, and your comments. Some companies, like Encana recently, are forced to take write-downs on hedging losses that may be temporary, and may not ever be realized if the hedge is held until maturity. Nonetheless, they have a loss this quarter, and must report it, even without selling. Other companies, in particular the financials, have it even tougher given that they cannot even price their security gains or losses.

It is kind of like selling your house. If your next door neighbor sells for a 50% discount, just because he is in need of cash, then all of the sudden any short-term appraisal of your property that uses recent selling prices could temporarily affect the appraisal value of your home, until of course the market corrects. Fortunately, if you are not selling soon, you may not care. But some companies don't have that flexibility. Others are selling debt at distressed levels (puking them up as they say in Wall Street elegance), and all of the sudden you have issues, even though you did not plan to sell anytime soon.

While you are right that companies may not be literarily pulling prices "out of thin air", when others sell at distressed levels, and then you get marked against it, it begins to feel that way, and makes it difficult for you to justify or describe a price that you don't understand, and that seems variable. No matter how you come up with a price for shareholders - using some type of valuation, mark-to-model, or using the last bid - it begins to look somewhat arbitrary. I am sure the Bear Stearns shareholders felt that way when offered $2 initially, yet had no way to know if that was even a fair value.

I would agree that many of the financials will probably not get to claim gains on the write-downs at a later time, but some, like Merrill for instance, might, given how they seem to have thrown in the kitchen sink during the recent transfer of power. The key is we just don't know in many cases, but still have to use something, even if it appears to be out of thin air. A little hyperbole? Maybe. But I think it illustrates how many of these companies feel. Thanks again for reading.