user 327894

Mark-to-Market Accounting: More Rules

Gtarras,

Again, Statement 157 does not require that your CDO's be reported at fair value, that is the result of other GAAP requirements that have been in existence for many years. Second, Statement 157 does not require that a specific index be used in valuing your CDO's. If you believe the index that the auditors are "forcing" you to use results in a value that understates the fair value of the CDO's and that some other valuation approach would provide a more accurate fair value amount you need to make that case with your auditor and if necessary with the audit committee. Remember that it is management that has the responsibility for the appropriate application of financial accounting and reporting standards--not the auditors. Good luck.

Mark-to-Market Accounting: More Rules

Rick,

You stopped one recommendation short in your reading of the SEC fair value study. Recommendation #6 states: "Accounting standards should continue to be established to meet the needs of investors." The second bullet under that recommendation states: "Most appear to agree that fair value measurements provide useful information to investors, meeting their information needs. Finally, the last bullet states: "General-purpose financial reporting should not be revised to meet the needs of other parties if doing so would compromise the needs of investors." What troubles me most about your initial blog and your continuing comments is that you are repeating the bank lobbyist mantra that that there is a significant problem with fair values causing financial assets to be understated because of illiquidity in the markets. That may have occurred in some limited circumstances, but there is simply no evidence that the occurrence is a common one. The SEC study makes that clear. As one example, the study states that "over 90% of investments marked-to-market are valued based on observable inputs, such as market quotes obtained from active markets." If you dig into this lobbyist orchestrated controversy a little more, you will find that the great weight of evidence indicates that many banks and insurance companies are holding significant amounts of financial assets that are overstated in value (not understated as you suggest) and the lobbyists for those industries are working hard trying to obtain changes to accounting standards that will help the industry avoid having to report that economic truth to market participants. If they win; investors, the capital markets, and the economy, lose.

Mark-to-Market Accounting: More Rules

Gtarras,

You and Rick need to reread Statement 157 and the subsequently issued interpretative eguidance. There is nothing in the Statement or the guidance that, in your example, "forces people to report them at 60-70."

On Dec 30 07:28 PM Gtarras wrote:

> "It would have been more correct for me to state that the amount
> of write-downs has been excessive rather than unnecessary. Clearly,
> the evidence for credit related defaults continues to develop. However,
> the underlying performance of many credit pools remains quite satisfactory
> and is subject to a growing pool of distressed asset buyers. Perhaps
> that is the only evidence that the marketplace may have driven these
> values down to too low a level."
>
> Rick, specifically, lets take super senior CDO positions on investment
> grade corporate portfolios. For example, the ones that have subordination
> so substantial, that it would take 30-40 IG defaults over period
> of 5 years for them to take a hit (impossible). They should be marked
> at 100 cents, however, FASB forces people to report them at 60-70
> cents. Multiply "lost" 30-40 cents by $1 billion on a single CDO
> and you get the huge write-downs that subsequently scare the hell
> out of investment public.

Mark-to-Market Accounting: More Rules

Rick,

The following white paper does an excellent job of explaining why your views on the appropriate measurement attribute for accounting for financial instruments are inconsistent with the views of most investors and many accountants, including why your views, if adopted, would be bad public policy.

www.cii.org/UserFiles/...

On Dec 30 10:21 AM Rick Konrad wrote:

> Hi 327894
>
> Thank you for your comment.
>
> Write-downs of credit instruments that reflect credit defaults are
> completely warranted and represent relevant and "honest" accounting.
> Hence, I agree with the notion that an asset whose value is impaired
> should be "tested" for impairment, and written down to the appropriate
> valuation.
>
> However, what has taken place in the last year has been a write-down
> of many assets to current "market" prices due to erratic, sporadic,
> and in many cases,forced selling.
>
> Such exaggerated markdowns and write-offs have forced what I view
> as unnecessary capital and regulatory consequences.
>
> I do not advocate a whistling past the grave approach and maintaining
> book value of assets through thick and thin when defaults are coming
> fast and furious.
>
> Fair value measures require (a) applying market prices regardless
> of how
> erratic the market may be, or (b) referring to prices of similar
> securities. When neither of those alternatives exists, companies
> employ models to determine fair value. As of yet, there is little
> accounting guidance as to how these models are to be constructed
> and what factors should be considered.Valuing what at present are
> fairly illiquid assets is a subjective job filled with conflicts
> and some fearing sanctions and/or litigation under Sarbanes Oxley
> may simply write down these assets even if they are not impaired!
> In a stressed market, unanticipated and unprecedented discrepancy
> between price and value have exacerbated problems with valuing assets
> "properly."
>
> Here is an interesting article from American Banker on the topic:
>
> www.onwallstreet.com/a...
>
>
> There is an excellent review on this debate from the Virginia Society
> of CPA's:
> www.vscpa.com/For_Memb...
>
> It would have been more correct for me to state that the amount of
> write-downs has been excessive rather than unnecessary. Clearly,
> the evidence for credit related defaults continues to develop. However,
> the underlying performance of many credit pools remains quite satisfactory
> and is subject to a growing pool of distressed asset buyers. Perhaps
> that is the only evidence that the marketplace may have driven these
> values down to too low a level.
>

Mark-to-Market Accounting: More Rules

Rick,

I would love to see your evidence that the write-downs have been "large and probably unnecessary." The weight of the evidence is that the write downs have, in many cases, not been large enough. With respect to whether the write-downs are necessary, please read about what happened in Japan in the 1990's when their financial institutions failed to report their losses in a timely and credible manner.