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Is It Fair to Blame Fair Value Accounting for the Financial Crisis?

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Quite simply, life is too short to waste it listening to an idiot babbling on about what boils down to Tinkerbell Economics "If you just believe in her, she'll come back to life! To say nothing of the fact that he incorrectly attributes a quote of Milton Friedman to Richard Nixon and couldn't bring himself to mention by name Warren Buffett regarding another quote. FTR, the first was the "We're all Keynesians now" quote, the second "When the tide goes out, you see who's swimming naked.

As if from to perhaps even the media had done anything but laud every element of the bubble from mortgage originators like CountrySlime to Alan Greenspan to all the Investment Banks that went kaboom? And quote whoever the pet economist du jour of the National Association of Realtors not only uncritically, but glowingly?

And please note that I am not taking a swing at his "supply-side" ideology here, simply because he either never described how it is supposed to work, or I shut this insane gibberish off before he got there. Rather, I could simply only take so much BS. And although not precisely supply-side, there IS a superb free-market critique of the housing bubble already out there I offer as an alternative: Thomas Sowell's The Housing Boom and Bust. Even where and when I disagreed with Sowell's analysis, at least he sticks to the facts, writes without bombastic hyperbole, and leaves Tinkerbell in the fairy tale aisle.

Check that one out, and do yourself a huge favor and pass this one by. View 1 comment. This book is like candy: has value because it tastes good and provides some energy.

Book Review: Change Your Thinking Change Your Life by Brian Tracy

You have to look elsewhere for a meal. Look at that title.

Obviously propoganda from a prominent supply-sider adding to the mountain of analyses that have been written on the housing crisis. The arguments are ok, just a lot of froof. He harps on the idea that mark-to-market accounting was a major factor in producing the full panic. His assertion: the reason the private sector takes the blame is because journalists don't want to lose the privilege of getting the government scoop.

Worth reading? For me, the jury never came back. Feb 20, Rob rated it liked it. This book was good, but it does assume a certain level of economic knowledge coming in.

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He does a very good job counteracting the various fear-mongers on both sides using actual data instead of arbitrary projections. As expected, he has harsh words for the politicians who try to stir up fear to grow the government think of Bush scaring everyone into the first "stimulus" vote in , or Obama behaving similarly in But he has equally harsh words for the conservative crowd's intense overre This book was good, but it does assume a certain level of economic knowledge coming in.

But he has equally harsh words for the conservative crowd's intense overreaction to what's gone on in the last several years. And the best part is that he backs it all up with good, historical data. Not guesswork or irresponsible extrapolations into the future. All said, though, this book would probably be a tough slog for someone who doesn't have some grasp of economics already hence 3 Stars. Jan 15, David rated it liked it.

I gave it three stars because it gets a little technical in the middle, but really this is good book. Explains how government policies, not capitalism, causes the problems with the economy. I also learned how mark-to-market account undervalued the assets of companies and contributed to the problems in Excellent book!

It is really not as bad as most people think!! Read it and find out for yourself Neil Rempel rated it really liked it Jan 18, Mike rated it really liked it Jul 31, Daniel rated it liked it Mar 22, Bill Perryman rated it it was amazing Dec 25, John rated it really liked it Jan 31, Thomas rated it really liked it Jan 29, Ed Goertzen rated it it was amazing Jan 26, Jason rated it really liked it Nov 25, Libby rated it it was amazing Sep 03, Doug Caron rated it liked it May 15, Only the most liquid securities subject to fair value accounting must be valued at direct market prices, according to Financial Accounting Standard These inputs could include, for instance, trading prices and discounts for securities similar or related to the ones being valued.

In marking assets to model, executives may use their own reasonable assumptions to estimate fair market value. When the debt markets froze during the fall of , FASB released a staff paper clarifying the application of fair value accounting to illiquid markets. FASB also stressed that companies did not have to use prices from forced or distressed sales to value illiquid assets. However, these rulings did not provide enough comfort for bankers watching the market value of their toxic assets plummet; they complained loudly to their elected representatives, who threatened to legislate accounting standards unless FASB provided more relief.

As a result, in April FASB quickly proposed and adopted a new rule, which detailed criteria for determining when a market is illiquid enough to qualify for mark-to-model valuation.

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The rule was designed to allow more securities to be valued by bank models instead of by market indicators. On the same day, FASB issued yet another rule on how to account for securities when they were permanently impaired. Those two retroactive rulings made it possible for large U.

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The rulings improved the short-term financial picture of these banks, although they also led bank executives to resist sales of toxic assets at what investors believed to be reasonable prices. Once we get beyond the mythmaking and arm waving, it becomes clear that historical cost and fair value accounting are much closer to each other than people think. Nevertheless, the differences between the two forms of accounting may be significant for a particular bank on a specific reporting date. So let us consider how banks might issue financial reports that would capture the complex realities of their financial situations.

Because banks are allowed to make reasonable assumptions based on their own estimates for rates of return on subprime loans, mortgage-backed securities, and other troubled assets over several years, mark-to-model valuations will usually be higher than those based on recent trades of similar assets. Marking to model lets banks paint a relatively optimistic picture of their financial condition.

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This is sure to give rise to real investor skepticism about the accuracy of bank valuations of troubled assets. How can we counter that skepticism and keep valuations defensible? Most important, a bank should disclose enough detail about the assumptions underlying its models to allow investors to trace how it reached valuations. The most fundamental criticism of fair value accounting is that it drives banks to the brink of insolvency by eroding their capital base. To investors, on the other hand, nothing is more artificial than proclaiming that an asset is worth a price no one is actually willing to pay.

The typical investor, moreover, is less confident that decreases in the market value of many bank assets are the temporary result of trading illiquidity, not the lasting result of rising defaults.

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It may not be necessary to reconcile these different perspectives. Both could be accommodated if banks were required to fully disclose the results under fair value accounting but not to reduce their regulatory capital by the fully disclosed amounts. Accounting and capital requirements could be unlinked in other areas, too, as long as banks fully disclosed the different methodologies.

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Unrealized quarterly gains and losses on bonds in the trading category, for example, could be accurately reflected on the balance sheet and income statements of the bank. But for regulatory purposes, its capital could be calculated on the basis of the average market value of those bonds over the past two quarters. Even if regulators were to further unlink bank capital calculations from financial results under fair value accounting, bankers would still be concerned about the volatility of quarterly earnings. A bank whose total net revenue—from fees and net interest income—was quite stable might see its overall earnings fluctuate significantly from quarter to quarter, thanks to changes in the current market values of its actively traded bonds and other assets.

Yes, if the bank published two versions of its earnings per share EPS each quarter—one calculated with fair value accounting and the other without. Suppose the bank reported EPS of 54 cents for the quarter, comprising net operating income of 62 cents per share and a loss of 8 cents per share due to unrealized losses in the market value of its bond portfolio.

The bank would also publish a second EPS of 62 cents per share, with an explanation that this second EPS excluded those unrealized losses. If banks published a reconciliation of their net cash flow with their net income under fair value accounting, investors would be able to clearly see what portion of operating income came from operating earnings and what portion came from movements in the securities markets.

The table below illustrates how this would work. It is not treated as an immediate expense and does not affect current income except through depreciation. Accounting accruals reflect routine bookkeeping entries. Recurring fair value changes describe items measured at fair value every period quarterly and annually.

Myth 2: Most Assets of Financial Institutions Are Marked to Market

GAAP requires adjusting these securities to fair value each period even if they are not sold. Remeasurements other than recurring fair value changes identify adjustments recorded only after a triggering event or when management decides that a decrease in value is other than temporary. At the same time, bank executives could better explain how their banks were earning stable profits from core operations, regardless of the quarterly price fluctuations in their securities holdings.

To cut through this complex debate and implement these needed reforms, politicians and business executives must recognize that there is no single best way to value the assets of financial institutions. Some assets may be more accurately measured under fair value accounting, while others may be better measured under the historical cost approach. For the foreseeable future, banks will continue to be subject to a mixed-attribute system, combining both methods.