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« SEC on Marking to Market: Another Problem Solved | Main | How to Win a Recession-Predicting Contest »

April 01, 2008

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jcfogerty

This article is a perfect example of why 'A Dash' is one of my favorite financial blogs. Great insight.

VennData

You use the narrative of the new student to begin a discussion that takes points from the SEC letter but do not see the awful result of this capricious methodology.

The new student in accounting - whether they end up in corporate or public - learns their first day of class that financial information must be relevant, reliable, and prepared in a consistent manner.

This regulatory allowance defies the consistency principle since the entity creates their own rules. Furthermore the timing of this regulatory change will not allow for the creation of a dependable, congruent set of guidelines.

The effect will be that financial statements will not be constant across entities, industries, nor regions.

It's a fudge to try to allow the current administration to be able to say they're sticking to their free market principles.

Why not allow homeowners to set the price of their own homes to get another HELOC?

oldprof

Barry -- We always welcome any corrections, especially when they are substantive and to the point. Telling people to re-read your article does not qualify. It is also not appropriate to make a blanket characterization about "misstating" your views. That is ad hominem, not on the merits.

The question is simple: Do you believe that reported home price sales accurately reflect the market? If not, what other measure would you use?

In your article you writes as follows: "Prices have failed to come down enough to jump start more activity. Sellers have been stubbornly sticking to their imagined top tick prices of 2005. Thus, Supply remains high, and if we believe the NAR or OFHEO, prices have slipped only slightly. Econ 101 informs us that until prices fall appreciably, the inventory situation will not improve."

Briefly put, you think offers and the resulting pricing are unrealistic. It is not a misstatement of your viewpoint. You then use this interpretation to predict that home prices need to fall appreciably, suggesting a disparity between the market price and some underlying value.

Readers must decide for themselves whether this is an apt comparison to the SEC liquidity/value issue. For me it stood out because I am already working on a piece related to your home pricing article and Econ 101.

And btw, this is not just an observation about Barry. Many of those writing about the housing market seem quite confident that current prices are, somehow, misleading.

Jeff

RB

I admit to finding this post needlessly provocative because I do not find Barry Ritholtz implying that homebuyers are offering unrealistic purchase prices.

Barry Ritholtz

I said nothing of the sort --

I was discussing the psychology of pricing -- no transactions. Read the piece you linked to, as well as the original piece it referenced from Sept 07.

Why is it that you specialize in misstating my views?

Harmso

From my expereience, real "marked-to-market" can only be done at standard instruments with high market participation.
That's not even the case for small cap stocks. And even for the midcap and such you have leeway with bid-ask spreads and similar. (In IFRS, Don't know about USGAAP)
Everything else is essentially marked-to-model. Either by drawing comparisons to "similar" instruments or trading models etc.

Those papers in distress were mostly never marked-to-market in any real sense anyway.

You rightly point out that one has to access critically what the whole letter states and not only parts. The same is even more true for financial statements of companies.

The discussion about marked-to-market is really important in my view. I must say I am still buidling my opinion on this point. But from what I read so far both sides of the argument are flawed.

First. The discussion, if reliable prices exist for some markets at the moment or not. See my comment above how wide range real marked-to-market really is.

Second: There is considerable leeway in your own inputs to the model. (If you are even using the right model that is)

Third: Of course traders and companies have strong incentives to post favorable numbers. This is btw also empirically proven many times if I remember my days in college correctly. Accountants try to work against those incentives. But from my experience, obviously most traders do not really cooperate very much in explaining an accountant his model.

Also people commonly mistake what "probably" the intention of the SEC was with what the real consequence will be on this highly dynamic system called the financial markets.

I have to think about this a little longer but in my opinion the SEC Letter is widening the room for the firms in a way which might backfire. The Points for more disclosure on certain topics are definetly welcome but I fear that without actual trading experience it will be very hard for most investors to realls understand those numbers and it could project a kind of false transperancy.

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