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« TCA-ETF Update Delayed | Main | A "Resolution Trust" for Credit Markets? Too late!! »

September 15, 2008

Comments

oldprof

Rob - Normally I do not reply to comments that are judgmental and devoid of substantive content.

I embrace the many thoughtful participants at "A Dash" whether they agree with my conclusions or not. Often they raise new arguments and new evidence.

Having said this, I am well aware of a certain reality. Many of those reading my work have made up their minds in advance. They do not really read. It is impossible to write anything important without getting dissent.

On FAS 157 for example, they think that I do not believe in fair value accounting. A careful reading shows that not to be true. I am questioning the measure, not the purpose. If you have a lot of experience in valuing illiquid assets, please share it with our readers.

So feel free to cast shame if it makes you feel good. My purpose is to help investors.

One thing you might consider -- If we had handled this FAS 157 issue properly, when I first advanced the issue, we might not be facing a trillion dollar bailout.

Just a thought, and feel free to join in again!

Jeff

Rob Reynolds

Shame on you for trying to perpetuate the lies that have been heaped upon us for so many years.

oldprof

Lord -- I wrote a rather lengthy reply a few days ago, but it seems to have disappeared! Can I blame my own editors?

I appreciate your links. We read the CFO article a bit differently. I see it as a rather minimal level of political influence. Do you really want these accountants to be treated like the Supreme Court? In our system there is supposed to be some oversight of agencies -- even independent regulatory bodies - -to make sure that the public interest does not get lost along the way. I am not very disturbed by what I read in the article, despite the obvious viewpoint of the author.

I'll study the othe paper more later, and try to sharpen up future pieces to reflect this analysis.

I really appreciate your contributions and the links ---

Jeff

Lord

An agency like FASB that is less likely to succumb to direct industry pressure is still subject to political pressure, up to and including being stripped of their authority through the SEC by congress,
http://www.cfo.com/article.cfm/3010039/1/c_3046595

Enron undermined political support for deference to industry allowing FASB to proceed with options expensing even though these were much more important to tech companies that also failed around the same time.

An nice analysis of the issues involved in financial market regulation is
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=536682

I haven't studied FAS 157 but understand there are level 3 assets that involve illiquid assets such as these have become though I assume it isn't much help or they would have already been used more then they already have, which is plenty. Fear will have to hit the levels greed previously did before trust will be reestablished.

oldprof

Venn -- As usual, you have an informed opinion. I am interested in the examples you cite, but cannot take them up in detail right now. If I get around to writing up this history, perhaps I'll seek you out for some counterpoint here.

Meanwhile, I urge you not to take the viewpoint that you have a monopoly on "reality" with FAS 157. I work with many different portfolios, early-stage companies, real-estate assets, and the like. Many of them lack liquidity and raise problems of valuation. The fact that someone chose to make a trade does not establish the value for everyone else. I really wish that critics would engage on the main point, that illiquid markets are not good at establishing fair value.

On a day like today, one wonders even about the liquid markets......

Please give this a little thought. Let us suppose that you had a mortgage on your house. A neighbor made a distress sale for personal reasons. Now imagine that you were forced to liquidate because of this. (Your loan agreement unwisely permitted this). That is a closer analogy to what is happening in the markets.

I struggle so hard to show two sides of an argument, carefully stating that FAS 157 did not CAUSE these problems.

What would you do if you were the SEC head? Would you just endorse the death spiral?

Thanks for helping to stimulate thought and discussion. As I told a colleague in a recent board meeting, I never object to those who disagree. We should all embrace intelligent argument.

Jeff

oldprof

Marius -- thanks for the good link!

oldprof

Lord - You are correct in noting the change in FASB policy. In our office we discussed the options issue many times at lunch. There were good arguments on both sides, including leading academics. I am not sure what Enron did to change things. To me, the issue was more about tech companies.

Back in the day, I taught a unit in the Public Administration class on regulation. The instances of political pressure come more from the "captive agency" argument than what you are citing here. In some agencies, the participants are either past or future employees of the regulated parties. Not so good for the public interest.

That is not the case with FASB. If anything, it is the opposite. These guys act like accounting nerds who are tone-deaf to reality.

So I am most interested in any real evidence you have to the contrary.

As always, I appreciate your continuing contributions and willingness to engage.

Thanks,

Jeff

Lord

The options treatment was first proposed in the mid 90s. Market and political pressure on FASB prevented its adoption until after Enron blew up. This is the common weakness of regulators compared to other forces.

I have to agree with VennData as well. If facing reality causes problems, the problem is reality, not facing it.

gaius marius

this might feed your furnace, prof.

http://www.housingwire.com/2008/09/16/fasb-pushes-ahead-with-securitization-killer/

VennData

Another point of view is that this accounting rule saved American capitalism by finally forcing a realistic look at the balance sheet. If companies go under, sobeit. The first word in tought love, is "tough."

They knew it was coming, and now we have a market-based system of valuations. We should request as many market-based principles be incorporated by the ISAC rules as we adopt them forthwith.

I would give more credence to complainers about mark-to-market if they would point out the inane 2004 SEC rule "Alternative Net Capital Requirements for Broker-Dealers That Are Part of Consolidated Supervised Entities" which allowed the ibanks to adopt any leverage they saw fit. Kudlow et al simply spin a partisan tale without it.

barry

Third world kleptocracies nationalize failed companies, destroy shareholder equity all in the name of 'financial stability' and 'protecting the common good'.

We have met the enemy and he is us.

oldprof

Lord -- I don't follow. FASB has made a number of moves that were opposed by most companies - the treatment of options is one example.

I am very interested in any ideas you have about when the catered to some political pressure.

Thanks,

Jeff

Lord

Nice summary. The problem with FASB though is that it is prevented from acting when times are good in order to maintain a rosy picture and can only act when times are bad and credibility of markets and power of government to pressure it to do as markets want has waned.

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