FASB endorsed FUD - Fear, Uncertainty and Doubt
From the Timesonline :
On Friday night, America’s chief accounting body, the Financial Accounting Standards Board, revealed that it would suspend the mark-to-market rules to take account of extreme market conditions. Institutions will be able to use their own estimates of an asset’s worth instead. The move follows pressure from the US Securities and Exchange Commission.
In a “position” statement, the board said: “In determining fair value for a financial asset, the use of a reporting entity’s own assumptions about future cash flows and appropriately risk-adjusted discount rates is acceptable when relevant observable inputs are not available.”
Now, it's all marked to "I wish it were". After caving to special interests pressure, we will have a significant relieft from accounting pressures (whoopee!) and an extreme downdraft in economic valuations. If you thinks things were a little negative last week...
Although FASB really didn't make any changes to the rules, they failed to tighten up the understanding, and left room for game playing. The level 3 category may prove to be the dumping ground now. The market won't go for it.
You see, smart investors don't count accounting dollars, they count economic dollars. It is really irrelevant what management says an asset is worth, what truly matters is what investors believe an asset is worth. Why don't our regulators get this? Do they really think all of us are that stupid? If you think we had a rough week earlier, you probably ain't seen nuthin' yet. As financials and shadow banks attempt to hide their losses behind the accounting shenanigan curtain, stage left, the market will respond to this ambiguity and lack of transparency the same it always responds in the face of opacity - with LOWER VALUATIONS!!! If the smart investor is really not sure of a price to be paid, he defaults to the lowest common denominator and works his way up from there. It may come to be that the mere increase of any level 3 assets will spell the death knell for a financial company.
Monday, 13 October 2008 12:24
posted by George Schubert
Gotta love charts like thatReport
Sunday, 12 October 2008 13:35
posted by Clark Thornton
It seems to me that the FASB's wiggle room is part of the last desperate efforts of the financial wizards to keep the system from finally imploding. How in the world is LESS transparency going to help, even for a day or two? This depressing news, coupled with the amazing data you posted from the Fed (in the previous post "Is the Worst Behind Us, Mr. Paulson?") seems to point to an inflationary blowoff at some point. Can bad assets be hidden with high-powered Fed liquidity forever?Report