The distortuon of the truth and blame shifting away from Wall St has begun.

Discussion in 'Economics' started by mokwit, Mar 17, 2008.

  1. mokwit


    The distortuon of the truth and blame shifting away from Wall St propaganda campaign has begun as refuted by this article. Obviously the people need to be "educated" and their perceptions "managed". This will be just another thing that "can't be discussed". Refco hearing was behind closed doors, so will any hearings from this debacle.

    March 17 (Bloomberg) -- If only we didn't know how badly off the banks are, then maybe we could save the financial system as we used to know it.

    That is the growing mantra from financial executives and their water carriers in Washington. The major problem isn't that banks made poor decisions and lost credibility with investors, in their view. The problem is that mark-to-market accounting is dragging down financial institutions and the U.S. economy, as House Financial Services Committee Chairman Barney Frank said last week.

    They couldn't be more wrong. And there's so much misinformation floating around the markets on this subject that it's time, once again, to debunk the myths.

    Myth No. 1: The rules known as Financial Accounting Standard No. 157 are to blame.

    The latest iteration on this tired saw comes from Christopher Whalen, a managing director at Institutional Risk Analytics, who gave an interview on the subject Friday. Among his recommendations:

    ``Rescind FAS 157 so if you have a real quoted price for an asset, fine, use it. Otherwise you allow companies to use historic cost. You had a transaction, you know what you paid for it, it's a fact. All this other stuff is speculation. We are literally creating the impression of losses.''

    The Awful Truth

    The truth: FAS 157 doesn't expand the use of fair-value accounting. Rather, it requires companies to divulge more information about the reliability of their reported fair values.

    Most companies won't even adopt FAS 157 until this quarter. All the standard does is require companies to disclose how much of their assets and liabilities are valued using quoted market prices, how much are measured using valuation models, and how much come from models using inputs that aren't observable in the market. That's it.

    Myth No. 2: Mark-to-market accounting is new.

    Companies have been ``marking to model'' for decades, and few people complained when banks and others were recording large gains as a result. The difference now, thanks to FAS 157, is that outsiders can see the extent to which companies' fair-value results are based on estimates, at least at companies that adopted the rules early.

    Financial statements always have been piles of estimates heaped upon a bunch of guesswork. Look through the footnotes to any company's financial statements, and you'll see that estimates are used for everything from loan-loss reserves, to income-tax and stock-option costs, even revenue.

    Solves Nothing

    Moving everything to historical-cost accounting wouldn't solve anything. For assets that aren't marked-to-market each quarter, such as goodwill and inventory, they still must be written down to fair value whenever their values have declined sharply and show no sign of bouncing back. The accountants call this an ``other-than-temporary impairment.''

    So even if we had historical-cost accounting today for all the mortgage-related holdings that have plummeted in value and for which there is no liquid market, companies still would have to estimate the assets' fair values and write them down accordingly. That's because the values probably won't come back anytime soon, if ever.

    Myth No. 3: Companies aren't allowed to explain their mark- to-market values.

    This is a fairly new one. Last week, the Securities and Exchange Commission said it is drafting a letter to let companies tell investors when they think the market values of their plunging assets don't reflect the holdings' actual worth. Companies also would be allowed to disclose ranges showing what their models say the assets might fetch in the marketplace.

    Guess what? Companies are allowed to do these things already in the discussion-and-analysis sections of their SEC reports each quarter. They also can make such disclosures in their financial-statement footnotes. What they can't do is print ranges on their balance sheets or income statements, any more than taxpayers can put down ranges on their Internal Revenue Service returns.

    Myth No. 4: Eliminating mark-to-market accounting will prevent margin calls.

    If you're a banker for, say, Thornburg Mortgage Inc. or Carlyle Capital Corp., do you think for a minute that you would hesitate to call in one of these companies' loans just because they started using historical cost to account for hard-to-value financial instruments? No way. The moment lenders decide the collateral isn't worth enough to support the loans, they'll demand more collateral or pull the plug, no matter what the financial statements say.

    Myth No. 5: The public would be better off without mark-to- market accounting.

    Investors are fully capable of understanding that unrealized losses on hard-to-value assets are estimates. They're also smart enough to know that values change over time. And in the case of things such as credit-default swaps that eventually might reach some settlement date, the fair-value changes include vital forward-looking information about what the future economic costs of these derivatives may be.

    What most investors can't tolerate is being kept in the dark, when companies in their portfolios are sliding toward insolvency and whistling along the way that all is well.

    We've got a meltdown, folks. Deal with it.

    (Jonathan Weil is a Bloomberg News columnist. The opinions expressed are his own.)

    To contact the writer of this column: Jonathan Weil in Boulder, Colorado, at

    Last Updated: March 17, 2008 00:01 EDT

    It was those pesky accounting standards that caused all this (although we managed to delay the biggie by a year)