Tuesday, March 18, 2008

On fair value accounting

So, there's an interview from today with a guy who claims that fair market accounting (FAS 157) is largely to blame for the meltdown in the financial markets. See: http://www.housingwire.com/2008/03/17/quote-of-the-day/

What's awesome about the interview is the audacity to say that it's so unfair and disruptive to force financial institutions to value to assets to market, because all the banks and IB's with their current assets would be insolvent when assets bubbles collapsed if they had to do so. Yet, and let me emphasize this, that's the entire g-damn point!!! Banks should not be holding their fractional reserves in leveraged derivatives to inflate their profits; it was true when Buffet said it several years ago, it's still true today, and it'll be true long after all the taxpayer-expense inflation-fueled bailouts are done.

If a decrease in one asset market could cause you to become insolvent as a bank, you should not be allowed to hold people's money. If you're a public company, you should have to disclose exactly what assets you are holding, so your shareholders can examine them and be aware of the risks. Alternatively, you should be required to provide a risk analysis relative to various markets of your investments, and be accountable if the actual performance falls below that metric. It's deplorable that a public company can be insolvent due to leveraged holdings, and its shareholders be unaware. It's a failure of adequate disclosure in rules or practice (or both), and should be addressed.

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