Wednesday, October 01, 2008

Latest bailout plan is to suspend fair-value accounting

Bloomberg:

Representative Todd Tiahrt, a Kansas Republican, said the House probably would have approved a $700 billion bailout of financial companies yesterday had the legislation included a suspension of fair-value accounting. The House rejected the measure 228-205.

It would have passed ``easily'' if the rules had been suspended, Tiahrt, who opposed the legislation, said today in a Bloomberg Television interview.


It looks like the Wall Street crooks are trying to change the accounting rules and they are using this bailout as an excuse. Unfortunately, it appears Congress is buying their bs hook, line and sinker!

Where were these crooks when the value of their assets was going up year after year? They were booking these increases in fair value to their bottom lines and paying out big bonuses based on these fair-value increases. Now that the assets are declining they want to stop this rule; so they don't miss out on another big bonus!


What is fair-value accounting?

For many years, standard setters have grappled with the issues associated with accounting for financial instruments. Decisions with regard to what valuation method should be applied have been difficult and in some cases controversial.

In 1994, FAS 115 was introduced into US GAAP as a partial solution. It required fair value accounting for many investments. In 2000, FAS 133 was introduced to improve the accounting model for derivatives by requiring fair value measurement. FAS 157, issued in 2007, established a common definition of fair value. Then FAS 159 expanded the ability of companies to elect fair value as their measurement basis for certain financial assets and liabilities.

Recently the US markets began experiencing significant illiquidity and volatility, creating conditions that made fair value assessments more controversial. The value of today’s innovative and complex financial instruments, such as derivatives, mortgage-backed securities and other structured financial products is subject to market illiquidity and volatility. Although fair value accounting could apply to other assets and liabilities, the focus of this piece is on financial instruments (particularly financial assets).

Implications of fair value accounting

While many agree that fair value yields a more relevant measure than historical cost, it is not perfect. Two controversies surround fair value measurements today: (1) the application of fair value accounting in illiquid markets, and (2) how and when modeling should be used as the method to determine fair value.

Fair value measurements in illiquid markets

Recent credit market conditions have resulted in large write-downs through the application of fair value measurements. Most of the charges have occurred within the banking and broker-dealer industries. Companies providing credit protection through credit default swaps on the under­lying asset, as opposed to insurance contracts, have been impacted by fair value measurements. Even though the default that would trigger protection may not have occurred, companies are required to recognize unrealized losses on the contract when the fair value of the underlying assets has significantly decreased. Also affected have been some corporations with investments in auction rate securities which suffered declines.

The requirements to use fair value measurements have been criticized for producing inaccurate results in the unusual market conditions recently experienced. Such results, it is argued, hurt the company in the long run. If a company must record losses in such an environment, critics claim, it signals bad news to investors that may ultimately be misleading. Therefore, they say, it is preferable to record only realized gains and losses.

In considering this controversy, it is important to recognize that accounting principles such as fair value are developed with the objective of providing information that will best serve the interests of investors, businesses and policy makers over the long term.

Summary

Balancing the factors, fair value still represents the most effective method to reflect the economic realities of market conditions. If fair value were suspended or replaced with some method based on historical cost, investors would be left to their own devices to determine the current value of these instruments—which would be less reliable and could delay any market recovery.

Although it has generated controversy, fair value continues to represent the best available methodology for determining and reporting the value of financial instruments. Markets naturally respond to financial information that fair value provides. The impacts of such measurements—whether positive or negative on a given company—are the results of market forces, not accounting methodologies. When market conditions result in volatility in values and earnings, investors benefit when companies transparently report on these circumstances and their impact on financial reporting.

1 comment:

Adam SlowHand Smith said...

I'm never surprised by ANYTHING I hear these guys are doing. There are NO limits to what they'll do to protect the market, just like there were no limits to what they'd do when the market was UP to keep it buoyant. There is NOTHING that resembles a free-market when price discovery and full disclosure is thrown out the window. "Let the buyer beware" is NOT the same as "laissez faire".

Like I say, there's a HUGE inherent bias for the market to go UP, whether by hook or by crook.

Bush applauds how wonderful free-market capitalism is, and how much he believes in it, until it turns against him and he decides to throw it's principles under the bus! It's like the old saying, "there are no atheists in foxholes?". Well, there's an equivalent saying for financial markets which states, "there are no laissez-fair politicians when the market is falling". All except for the strongest-minded politicians ALL feel they HAVE to do something, anything, and the "something" they usually choose to fix the market is usually fascist, if not socialist (more accurately called 'crony capitalism', or 'corporatism').

We've NEVER seen such corporatist moves from ANY sitting President as what we've seen lately, even just today with Paulson's plan to buy stocks in banks (!), and the proposals for housing by McCain are more socialist than anything proposed by Obama. However, that doesn't stop the Republicans from using fear-mongering against Obama to accuse him of being foreign-born, an Arab, someone who "pals around with terrorists".

They've thrown out free-market principles, and Bush wraps himself up in an American flag, hoping no one notices he's actually a naked socialist.

Oldest trick in the book: accuse your opponent of being what YOU actually are.