George Rebane
RR readers have been kept up to date on the impact of FASB’s mark-to-market (MTM) rules on the current “Panic of 2008”. Today the world’s security markets reacted very positively to the international quiver of bailout arrows fashioned over the weekend that included the Financial Accounting Standards Board’s “clarification” of MTM. Wesbury and Stein, economists at First Trust, in ‘FASB Pivots on Mark-to-Market’ write –
While many accountants argue that mark-to-market accounting provides transparency, the markets know differently. Fair value accounting in the past year has caused nothing but problems, and in the end has created the opposite of clarity. In illiquid markets, short-sellers can use fair value accounting as a tool to destroy the financial firms in which they are short. Short-sellers are sophisticated enough to understand that if they put a low-ball bid on securities held by the firms they are short this could force assets to be written down with mark-to-market accounting rules to the level of the low-ball bid.
The alternative to MTM is to price an asset according to ‘cashflow analysis’ which accounts for the present value of the expected stream of future cashflows (usually payments to the holder of the asset). The markets have known and accepted this for decades. Forcing MTM pricing of an asset has been a short seller’s dream because of the vicious positive feedback involved. Wesbury and Stein go on to explain –
So far, the short-sellers’ view of the world has dominated, with many pundits arguing the “real” price of subprime loan pools should be down in the 20s, where the bids are found. However, with at least 75% of subprime loans still performing, a cash flow analysis of these pools would allow them to be priced closer to the 70 cent offer.
What this means is that if financial institutions are able to argue cash flow analysis to the auditors, the fire sale write downs of illiquid loan pools will no longer erode financial market capital. This will not impede transparency because knowledgeable investors understand how to value assets. What they can’t deal with is the risk that an accounting rule could drive a firm out of business. The short sellers gorged themselves on this accounting rule, while potential investors ran away from it.
With this clear explanation we see how important rules and regulations are to orderly markets and an orderly society. And also, how hard it is to fashion good ones that don’t have devastating side effects that can often become the main event that threatens the fabric of everything we value. And, of course, our Congress, the world’s greatest deliberative body of dubious dufuses is the progenitor of all these rules and regulations. But we always have to remember that it is we, a bigger body of unquestionable and unquestioning dufuses, who send them to Washington.
Moving right on to the grossly understated national debt that hides over four times its putative amount (about $11T) in unfunded liabilities (about $60T), the sum of future payments that our government has committed to pay designated recipients, I want to share a find with you.
Last year Mike Hewitt, editor of DollarDaze.org, wrote an important article explaining the make up of our national obligations – who owes how much to whom. It is one of the most clear, complete, and concise explanations of a very complex situation that uses well-designed graphics to help us all get at the important details. Most definitely worth a read for anyone who thinks buying “low risk” Treasuries will keep their nest egg safe. If not already, you will then know why the government has no choice but to destroy the dollar.
