imnotadoofus

Amity Shlaes: Paulson Plan Bring On Accounting Deja Vu

As a professional investor I have argued with colleagues that the mark to market imposition imposed by FAS 157 and 159 beginning late in 2007 would have consequences. A CEO of a mortgage REIT told me that he was concerned about Bear Stearns. I asked why and he said that with $300 billion in assets it only required a 5% haircut to eliminate its capital, which was $15 billion. I thought he was too pessimistic since the Bear was a venerable Wall Street institution, but he suggested that FAS 157, the "fair value" accounting rule, would wipe out its capital.

So much for the Bear. Now it--FAS 157--has further eroded capital across the financial sector and has been instrumental in the demise of WaMu and probably the cause of the impromptu marriage of Wells and Wachovia. But it also was partly responsible--in my opinion--for the many other disasters that have these past few months. As capital is eroded by the irrational mark downs, investors and wholesale funding agencies pull their lines and/or withdraw funds. And the rating agencies also contribute to the downward spiral by calling into question the ability of institutions to survive its downgrades. All this because of a foolish mark-to-market rule that bears little resemblance to the actual value of the assets in question. ABX and CMBX are the arbiters, not the discounted cash value of the asset in question, whether pooled real estate mortgages or other assets similarly packaged and sold world wide. So goes the conflagration!!!!!