Tuesday, October 14, 2008

Mark To Market Still Lives (Unfortunately)

Mark to Market was upheld Friday.

No, it was not suspended as some media outlets had originally reported.

Yes, early Friday afternoon there were reports that the FASB, the board which determines the rules for financial accounting in the United States, had suspended the practice commonly known as 'fair value' or 'mark to market' accounting. This is false.

And still other outlets implied that although the rules were not suspended, they were nevertheless loosened somewhat. This is also false.

I talked to Neal McGarity, the helpful and gregarious spokesman for FASB, who explained that the board action today was a reaffirmation of a document released jointly by the SEC and the FASB on Sept. 30. "It's not a new stance or new material, it's cross referenced to existing material."

The problem here is that most journalists don't understand how FASB works.

The Financial Accounting Standards Board, is, well, a board. They vote on the proposals put before them. Since there had been so much confusion about the mark to market rules, the staff drafted a statement ten days ago, clarifying the existing rules. But that's not official until the board votes. Friday the board voted, and 5 to 0 they said, in essence, mark to market still applies, but where the market has broken down, financial officers may consider other factors.

In my opinion, that's not good enough.

The current environment is a mix of the storming of the Bastille and a Salem witch hunt. CFOs and auditors are going to want to be perfectly sure. After "Sarbox," the penalty for overestimation is measured in years served, not fines paid. Until the SEC suspends the rules, or failing that, provides some kind of safe harbor (a very clear set of rules which when followed keeps one out of cell block 8) the panic will continue.


Intrade said...

Dew Boy said :

    Boyer is a hack that blames dems for every thing wrong with the market. "What ressession" Boyer, just a idiot who has got to have lost alot of folks a ton of money. Thats fine with me Im having the best year in 5. This idiot overlooks enron/worldcom accounting and wants to go back to it. Pure and simple. Follow him and you'll be fighting for road kill as hunger sets in.

Intrade said...

common_sense said :

    Mark to market is not perfect but it is the best way to determine the value of assets bar none. Anyways, changing it now will only cause the crisis to extend itself because everybody will know that any sudden revaluations of the books will look fake and undermine confidence in good and bad institutions. In the future we need regulation of all financial instruments, create counter-cyclical capital requirements for banks and try to convince Asian countries that should not hoard their dollar reserves but use them to create consumption during the coming recession. An easy way to do this would be to float their currency but because that is unlikely to happen, perhaps large scale infrastructure investment or tax credits can be used to pump their economies.

Whatever we do, we are in the tank for at least 2 years. Three cheers to bargain hunting until then and selling when the markets return to a high in 2010! Hopefully this time it will be Asian led consumption and Western lead investment which is a lot more sustainable.

Intrade said...

florida boy said :

    hey dew boy..you prove Jer' point...what recession!...you're having the best year in 5!
as for road kill...come on by an I'll have granny fix you up sum "possum' stew. you like dat with grits or greens

Intrade said...

profit-only-market said :

    I am not trying to hackle anyone, but it is funny to see capitalists not able to trust the markets. I suppose markets are only good as long as there is profit.

Intrade said...

ADK said :

    The premise of this article seems to be that we need to suspend disbelief into flawed financial instruments and overvalued assets by pretending they are worth something they aren't, in order to recover from a credit crunch. That seems fundamentally wrong and contrary to any free market philosophy. Bright they ain't, them financial boys.

The best (satirical) exposition I have seen about this whole thing, including the mark-to-market "problem":


Intrade said...

intradeER said :

    Nice Article

Intrade said...

Boyer & Economics said :

    The guy has a terrible track record -- his book The Bush Boom is a laugh!

Check out this:

Intrade said...

The boom? Not! said :


Intrade said...

california said :

    Just as an airplane or car fuel gauge compensates with movement, so should the value of assets.

Intrade said...

Dew Boy said :

    "Bush Boom" = Bush Bust. Along with Boywer bust. The fiction is now a known joke. Shorting this turkey has been rewarding. Thanks to "What ressesion" Boywer. MAYBE HE A PUMP AND DUMPER. Not!

Intrade said...

Domingo Tavella said :

    Not marking to market obscures the true value of assets even more and adds to the risk of the institution by masking its value.

It is insufficient capital reserves that is the problem, not the other way around.