Wednesday, October 1, 2008

SEC is Trying Sooooo Hard

The SEC and FASB banded together and modified or suspended what was perhaps the thorniest part of the mark to market rules.

"Tuesday, the SEC and Financial Accounting Standards Board issued "clarification" to accounting rules that require companies to value securities at the price for which they can be sold in the market, known as mark-to-market, or fair value, accounting. FASB said it is preparing additional guidance for later this week.
The clarifications allow executives to use their own financial models and judgment if no market exists or if assets are being sold only at fire-sale prices. They were welcomed by banking and financial-services groups that have lobbied the SEC and FASB to change the rules. Those efforts were ramped up in recent days as Congress was drafting a rescue bill."
The phrase "if no market exists" is going to cause all kinds of problems with OTC securities, and leaves all kinds of wiggle room. I'm in favor of a lot of heavy lifting to get the credit market moving again but this element is going to be very difficult to oversee.
The concept "if assets are being sold only at fire-sale prices" is part of the problem with the back and forth this week. If Firm A sells a portfolio of loans at 6 cents on the dollar, is that the market price? If the Federal government pays 30 cents on the dollar for a similar portfolio that some dude at Pimco valued at 65 cents on the dollar, are the Feds paying above market or below?
I'm confident that there is a price that the Fed can pay where the taxpayer makes money and the banks are happy to sell.

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