Suspension Of The Fair Value Accounting Rule By SEC And Congress Is Causing Credit Gridlock And Places One's Investments At Risk
Friday, 3. October 2008, 15:02:19
Credit Markets Are Drying Up And Short Term Funds Used To Pay Payrolls Are Not Available
Runs on funds are causing the death of the short term funds used by organizations to meet payroll and pay bills, as the value of short term commercial debt diminishes and the value of other debt is unknown and cannot be sold. The underlying issue here is a "crisis of confidence" which comes from the FASB accounting rules being so lax, that "fair value" can not be ascertained on the asset values, that is the value of debts, in the funds portfolios.
The current situation is that the fair value accounting rules have been suspended by the SEC.
This is something that John McCain applauds as is documented in the Newsday article McCain Says Mark To Market Suspended
Companies and funds are buying only Treasury Bills and Paper as is seen in the Capstone Report which focuses on how the Liquidity Meltdown Crisis affects colleges:
"An investment fund that serves about 1,000 colleges and private schools partially froze withdrawals this week amid the credit crunch, forcing colleges to develop new plans to pay bills.
Wachovia Bank, trustee for the $9.3 billion Short Term Fund offered by Commonfund, said Monday it was terminating the fund and establishing a process to ensure the orderly liquidation and distribution of the fund's assets. Wachovia initially told investors Monday that they could only withdraw 10 percent of their money, but that figure was increased to 34 percent by Wednesday and 37 percent by Thursday, October 2, 2008.
Commonfund, a Wilton, Conn.-based nonprofit that advises colleges and schools on money management, also said Thursday it put a 30 percent limit on withdrawals from its Intermediate Term Fund after investors in the Short Term Fund tried to withdraw money from that fund, said Keith Luke, managing director of Commonfund.
About 200 colleges and universities have about $1 billion in the intermediate fund, which is used for long-term needs, such as equipment plant purchases, he said.
"We just didn't have the liquidity in the fund to do that," Luke said. "We will relax that as soon as market conditions permit."
Partially freezing the Short Term Fund as officials prepare for liquidation prevents a run on money and protects investors, said Laura Fay, a Wachovia spokeswoman.
"It was not something we took lightly," Fay said. "In this environment, we felt this was the best way to proceed."
Some colleges are securing lines of credit because of the restriction on accessing money from the short-term account, according to Matthew Hamill, senior vice president of the National Association of College and University Business Officers. That means borrowing costs that effectively reduce their rate of return in the original investment, he said.
Hamill said he does not expect the issue to affect students and their families and noted that the crisis has eased somewhat with a greater percentage of cash allowed to be withdrawn.
"I think most institutions are feeling far more confident in the short run the fund will be there for what its needs are," Hamill said. "The remaining question on everyone's mind is exactly when the remaining balance in the account will be available."
The fund provides returns slightly above U.S. Treasury bills. About 85 percent of the fund was invested in high-quality commercial paper from blue chip companies, while the rest is in securities backed by mortgages and other assets, Luke said.
Amid the housing industry slump and turmoil affecting banks and credit markets, such investments have become increasingly unpopular as investors seek safer options like Treasury bills.
Commonfund said recently volatile markets have hurt the 15 percent to 20 percent of the Short Term Fund's portfolio held in mortgage- and asset-backed securities.
There have been no defaults in the fund's portfolio so far, Luke said.
"Credit markets have frozen, which has made trading of even the highest quality short term financial assets impossible at virtually any reasonable price," Commonfund wrote in a letter to clients Wednesday. "In light of these markets, we believe that the trustee feared that a sudden increase in redemptions could force a liquidation of securities in a frozen market and decided to take pre-emptive action."
Commonfund said it pledged $50 million of its corporate reserves in April to back the fund.
Fay said Wachovia's decision was not affected by last week's announced $2.1 billion deal for Citigroup to buy Wachovia's banking operations.
Wachovia's decision to slowly liquidate the fund is designed to prevent a rush by investors. When a fund sees such a rush, fund managers must sell assets — typically at a loss when it must be done quickly, and especially amid the recent market turmoil.
A slow liquidation helps protect investor returns and ensure each investor would be treated equally.
A rescue package approved by the Senate late Wednesday would let the government spend billions of dollars to buy bad mortgage-related securities and other devalued assets held by troubled financial institutions. If successful, advocates say, that would allow frozen credit to begin flowing again and prevent a serious recession.
By the end of the year, investors in the Short Term Fund will be able to withdraw at least 57 percent of their money, Luke said. Asked if investors will ultimately get all their money back, Luke said, "We certainly expect that."
Commonfund is working with the colleges and schools to help them find alternative sources of financing, Luke said.
"We feel terrible for them," Luke said. "We want to help them. We're working very hard to do so."
Bethany College — a Lutheran school in Lindsborg, Kan., with 600 students and a $12 million budget — has $700,000 invested in the fund.
"Obviously we weren't planning on withdrawing all at once," said Aubrey Streit, a spokeswoman. "We're just re-evaluating our plan for how we will work with the cash flow over the course of the next academic year."
Bethany College is not in a state of panic, Streit said, but she noted that the investment was a significant part of its budget.
"It wasn't something we expected," Streit said. "It really makes it real to see the financial impact coming here."
Grinnell College in Iowa had about $4.8 million in the fund, but was able to withdraw 34 percent, said Russell Osgood, the college's president. With a $1.5 billion endowment, he was not worried.
AP business writer Mark Jewell in Boston contributed to this report. Source: AP News
One Response to “Liquidity crisis for colleges?”
Christopherson Says: October 2nd, 2008 at 7:14 pm
I’ve already heard from numerous sources that UA will be a lot harder to be accepted into now that they’re at an all time high of 27,000+ students. I imagine the economy crisis is only playing into the university officials’ plan.
The Bailout Bill Has Gone Back To The House Providing Tax Breaks, An Increase In FDIC Insurance, And A Restatement Encouraging Suspending Fair Value Accounting Provided
James Rowley and Nicholas Johnston Bailout Bill Sent Back to House After Senate Passage (Update2) report that "The Senate also sweetened the (bailout) measure for Republicans by authorizing the government's purchase of troubled assets with a $149 billion package of tax breaks. They would spare 24 million households from a $62 billion alternative minimum tax and extend $17 billion in benefits to companies that produce alternative energy.
And added to the rescue plan this week is a temporary increase in the limit on federal deposit insurance to $250,000 from $100,000 aimed at discouraging people from pulling their money out of banks.
The Senate bill also reiterates the U.S. Securities and Exchange Commission's authority to suspend an accounting rule that bankers and other corporate executives say exacerbates their troubles; as indicated in the Elizabeth Williamsonand Kara Scannell Wall Street Journal article Momentum Gathers to Ease Mark-to-Market Accounting Rule
The so-called fair-value standard requires companies to review assets and report losses if their values decline. Lawmakers, the American Bankers Association and companies including American International Group Inc. have urged the SEC to suspend or ease the rule, saying it forces firms to report deeper losses than needed on assets such as subprime mortgages.
Jesse Westbrook of Bloomberg in SEC, FASB Resist Calls to Suspend Fair-Value Rules (Update2) reports that "The U.S. Securities and Exchange Commission probably will resist calls to suspend the fair-value accounting rules that some members of Congress blame for exacerbating the global financial crisis, people familiar with the matter said.
The SEC and Financial Accounting Standards Board today issued ``clarifications'' on how banks should interpret existing rules requiring them to review assets each quarter and report losses if values decline. A moratorium isn't being considered, said the people, who declined to be identified because the plan hasn't been completed.
Congressmen, banking lobbyists and companies including American International Group Inc. have urged the SEC to suspend fair-value accounting, saying it forces firms to report losses they never expect to incur. Federal Reserve Chairman Ben S. Bernanke and other proponents say removing the rule would erode confidence that firms are owning up to losses.
``In the past couple of weeks, fair-value accounting has been under attack,'' JPMorgan Chase & Co. analyst Dane Mott wrote in a report today. ``Blaming fair-value accounting for the credit crisis is a lot like going to a doctor for a diagnosis and then blaming him for telling you that you are sick.''
SEC spokesman John Nester declined to comment. FASB spokesman Neal McGarity didn't return a phone call seeking comment.
House Rejection
Representative Todd Tiahrt, a Kansas Republican, said the House probably would have approved a $700 billion bailout of financial companies yesterday had the legislation included a suspension of fair value accounting. The House rejected the measure 228-205.
It would have passed ``easily'' if the rules had been suspended, Tiahrt, who opposed the legislation, said today in a Bloomberg Television interview.
Bernanke said in Sept. 23 testimony before the Senate Banking Committee that if regulators repeal the rules, ``nobody knows what the true mark-to-market price is.''
Fair value rules require companies to determine how much assets are worth based on what they could expect to sell them for on the open market.
``Suspending the mark-to-market prices is the most irresponsible thing to do,'' said Diane Garnick, who helps oversee more than $500 billion as an investment strategist at Invesco Ltd. in New York. ``Accounting does not make corporate earnings or balance sheets more volatile. Accounting just increases the transparency of volatility in earnings.''
`Unrealistic Prices'
Anne Canfield, executive vice president of the Consumer Mortgage Coalition, counters that businesses have been forced to ``mark down their assets to unrealistic fire-sale prices,'' because trading has dried up. Canfield, whose group represents mortgage lenders, urged the SEC to suspend fair-value rules ``immediately'' in a Sept. 29 letter to the agency.
The SEC and FASB, in today's statement, encouraged companies to rely more on their own judgments, such as expected cash flows, in determining the current value of assets that aren't trading. The regulators also said price quotes provided by brokers when markets are frozen may not be the most reliable way to determine how much securities are worth.
Norwalk, Connecticut-based FASB, which writes U.S. accounting rules, is preparing ``additional interpretive guidance on fair-value measurements'' to be released this week, the SEC said. FASB will discuss fair-value accounting at its board meeting tomorrow.
Bankers Association
The American Bankers Association, a trade group representing lenders that has lobbied the SEC over fair value accounting, praised the agency's clarifications, saying they will ``help auditors more accurately price assets,'' according to a statement released today.
The collapse of the subprime-mortgage market has contributed to more than $500 billion of losses and writedowns at global financial companies. Treasury Secretary Henry Paulson is seeking authority from Congress to ease the crisis by buying mortgage-securities and other assets from banks.
U.S. Senate leaders and President George W. Bush vowed today to revive the $700 billion financial-rescue plan after the House rejected the legislation.
House Plans Second Vote On $700 Billion Bailout
Friday October 3, 6:40 am ET, Julie Hirschfeld Davis of the Associated Press writes that converts in the House are "reluctantly embracing" $700 billion bailout ahead of today's make-or-break 2nd vote.
Black lawmakers said personal calls from Democratic presidential nominee Barack Obama helped switch them from "no" to "yes," as Republicans and Democrats alike said appeals from credit-starved small businessmen and the Senate's addition of $110 billion in tax breaks and other sweeteners had persuaded them to drop their opposition.
Rep. John Lewis, D-Ga., told a closed-door meeting of House Democrats that he would support the bill after speaking with Obama about it.
Congressional leaders "worked over" wayward colleagues wherever they could find them.
Rep. Bobby Rush, D-Ill., also said Obama was asking him to reconsider his vote. "I'm seriously listening," Rush said
The Investment Application
The SEC has stated that the fair value accounting rules have been suspended. And the bailout legislation is likely to be passed with a statement to the SEC that it suspend fair value accounting, which is redundant given that it has already suspended the rules.
Yet, the suspension of fair value is modern day Enron accounting, and is obscuring the true market value of their assets in fund values and in debt instruments, intensifying the credit crisis day-by-day. Liquidity is freezing up. This means there is no liquidity to grease the wheels of the economy.
There is coming ever increasing credit gridlock where companies will be unable to meet payroll and pay debt as it comes due, as the funds they rely on do not honor redemptions.
When the legislation passes, and is signed into law by the President, then the US government will be stuck with buying assets that are market to fantasy. And I can assure you that the Federal Reserve is going to be buying assets primarily from chrony organizations, such as JP Morgan and Morgan Stanley, and from only those organizations which if they fail would hurt JPM and MS.
What this means is that the assets, that is the debts, on the books of massive numbers of banks and others, will really be reinforced as worthless.
The passage of the legislation will mean a write down of commercial debt instruments across the board with the longer out, getting a greater marketplace haircut.
Debt ETFs, such as LQD, HYG, CFT and EMB will continue to loose value; and the principal value of the tax free municipal bond mutual funds like USSTX, will continue to fall, as interest rates rise. And the municipal bond ETFs such as MUB and TFI will continually go lower as well.
The suspension of fair value accounting means an ever increasing flight of capital out of the municipal bond market, and thus will soon cause a shut out of municipalities from the credit markets.
The suspension of fair value accounting means companies will find no buyers of corporate debt; and thus, a closure of lending markets.
We are quickly moving from a situation where the US Treasury Notes and Paper is desirable, to a situation where only the US Government Debt will be honored, that is bought and sold!
In other words, only US government debt will be held as valuable, because fair value accounting rules have been suspended by both the SEC and by congressional mandate.
I relate that while Regional Banks, IAT, are currently up 22% since the US Dollar stock rally began, July 14, 2008, when the yen carry traders, sold oil, USO, and commodities, RJI, to go long the banks, the facility of TARP provided under the Emergency Economic Stabilization Act of 2008, that is EESA, is unlikely to be of much help to most regional banks. The authority and facilities given to the Federal Reserve Chairman by the Paulson-Bush-Pelosi bailout legislation provide a rescue of derivative laden and threatend JPMorgan, Citigroup, Bank of America and Morgan Stanley, and not of the community and smaller banks.
If one is invested in these, it's best to sell out now of all Regional Banks, as they will be falling in value once the legislation is passed.
The 3 month on going Yahoo Finance chart of IAT, compared to ITB, and IYR, shows the 22% rise. Here is the chart showing the 22%.
Yes, pull out as my perspective is much the same as that of Joshua Crown in The Accounting Rule You Should Care About where he relates: A change of course!
Tuesday afternoon, the SEC and FASB seemed to change course on the rule, as they published new guidance to firms. The two organizations said when the market for a security disappears, it is now allowable to arrive at a value using "estimates that incorporate current market participant expectations of future cash flows, and include appropriate risk premiums, is acceptable."
In plain English, banks may not be forced to take huge writedowns on investments that lost all their value. But the guidance is just that: guidance. The SEC and FASB suggested that more concrete rule changes could come later.
While the possible end of mark-to-market might please critics of the rule, it doesn't satisfy everybody.
Some financial experts argue that even though banks and Wall Street firms may be able to make their balance sheets look better if the rule changes, these companies will be less attractive to investors because there isn't as much information about their true financial condition.
"The garbage is on the books and no one wants to admit the original error of purchasing this class of assets," said Barry Ritholtz, CEO of Fusion IQ, a research firm.
Ritholtz said mark-to-market accounting forces banks to honestly disclose what they own and how much those investments are worth. Changing the rule would make it tougher to come up with a bank's real value.
"I would advise our clients and the investing public that owning any financials that failed to disclose their holdings accurately is no longer an investment. It is pure speculation, with more in common to spinning a roulette wheel," he said.
Gold Is The Safe Haven
I believe a run on stock brokerages is coming soon; and I suggest that one take one's money out of brokerage accounts, and that one buy gold, even though gold can easily fall from its current $840 to $825, $800 or $775, with a falling EURJPY.
And the gold ETF, GLD, could very easily fall to $77.50.
While bank accounts will have higher FDIC limits, I want something that is tangible, that I can secure, that I can personally own and have a large degee of personal control over.
I recommend diversification of investment in gold in four locations immediately because of financial system instability and lack of liquidity: the gold ETF, GLD, directly through streetTRACKS Gold Trust, and not in a brokerage account; two BullionVault, three GoldMoney; and four a limited number of gold coins.
I am simply a blogger who communicates what I see as an investment demand for gold; I suggest that one consult with a licensed investment professional before making any investment decisions.
Helpful Interactive Charts For Gold
The Yahoo Finance ongoing chart of GLD relative to the EUR/JPY and the USD/JPY, provides fascinating insights into the interplay of gold and the two major currency pairs.
Gold, $GOLD.
The gold ETF, GLD.
The US Dollar, $USD.
US Treasuries, TLT
The Ten Year US Government Note, $TNX
The on going monthly MSN Finance chart of the gold ETF, compared to world stocks, EFA, and US Stocks, VTI, and US Treasuries, TLT
The ongoing five day Yahoo Finance chart of gold, GLD, relative to the US Dollar ETF, UUP, and the Euro, FXE, and oil, USO
The on going five day Yahoo Finance chart of the gold ETF, GLD, compared to FXE, EFA, and EEB
The on going five day Yahoo Finance chart of the gold ETF, GLD, compared to IWM, and SPY
The on going five day Yahoo Finance chart of the gold ETF, GLD, compared to FXE, USO, and RJI
The ongoing ten day MSN Finance chart of EUM, compared to TWM, SDK, and SFK
The the ongoing five day Yahoo Finance chart of EUM, compared to TWM, SDK, and SFK
The ongoing five day Yahoo Finance chart of the yen, compared to gold and the world's major currencies
Gold relative to world stocks: GLD:EFA
Gold relative to US Stocks: GLD:VTI
Gold relative to the euro: GLD:FXE
Gold relative to world currencies: GLD:DBV
Gold relative to oil: GLD:USO
Suggested Reading And Things To Reflect On
LIBOR Rates Pushing World To Hyper-inflation? Is disregard for fair value rules of accounting going to create massive hyperinflation?
The Ted Spread as of the writing of this article it has gone into uncharted territory at 3.83, that may be a new high; this is like throwing a wrench into a working machine; all I can relate is that the global financial system is going to come to a screeching break down very, very soon.
KeNo's Housing And Economic Portal provides a section of various state, municipality and small businesses being hurt by the credit crunch.
The SEC May Get New Authority Over Fair Value Accounting Two little noticed provisions are Sections 132 and 133, which represent a significant and potentially far-reaching intrusion by Congress into the process by which accounting principles are formulated and implemented. Section 132 gives the SEC the authority to “suspend … Statement Number 157 of the Financial Accounting Standards Board, FASB.
Stop Enronization Of Banking The current bailout legislation does not instill or create trust in wall street and banking.
Goldman Is Getting The Best Of The Credit Crisis Goldman Sachs opponents have been vanquished and bad bets wiped away. Given that its charter has been changed to the status of a bank holding company, it will be the last bank standing.
Runs on funds are causing the death of the short term funds used by organizations to meet payroll and pay bills, as the value of short term commercial debt diminishes and the value of other debt is unknown and cannot be sold. The underlying issue here is a "crisis of confidence" which comes from the FASB accounting rules being so lax, that "fair value" can not be ascertained on the asset values, that is the value of debts, in the funds portfolios.
The current situation is that the fair value accounting rules have been suspended by the SEC.
This is something that John McCain applauds as is documented in the Newsday article McCain Says Mark To Market Suspended
Companies and funds are buying only Treasury Bills and Paper as is seen in the Capstone Report which focuses on how the Liquidity Meltdown Crisis affects colleges:
"An investment fund that serves about 1,000 colleges and private schools partially froze withdrawals this week amid the credit crunch, forcing colleges to develop new plans to pay bills.
Wachovia Bank, trustee for the $9.3 billion Short Term Fund offered by Commonfund, said Monday it was terminating the fund and establishing a process to ensure the orderly liquidation and distribution of the fund's assets. Wachovia initially told investors Monday that they could only withdraw 10 percent of their money, but that figure was increased to 34 percent by Wednesday and 37 percent by Thursday, October 2, 2008.
Commonfund, a Wilton, Conn.-based nonprofit that advises colleges and schools on money management, also said Thursday it put a 30 percent limit on withdrawals from its Intermediate Term Fund after investors in the Short Term Fund tried to withdraw money from that fund, said Keith Luke, managing director of Commonfund.
About 200 colleges and universities have about $1 billion in the intermediate fund, which is used for long-term needs, such as equipment plant purchases, he said.
"We just didn't have the liquidity in the fund to do that," Luke said. "We will relax that as soon as market conditions permit."
Partially freezing the Short Term Fund as officials prepare for liquidation prevents a run on money and protects investors, said Laura Fay, a Wachovia spokeswoman.
"It was not something we took lightly," Fay said. "In this environment, we felt this was the best way to proceed."
Some colleges are securing lines of credit because of the restriction on accessing money from the short-term account, according to Matthew Hamill, senior vice president of the National Association of College and University Business Officers. That means borrowing costs that effectively reduce their rate of return in the original investment, he said.
Hamill said he does not expect the issue to affect students and their families and noted that the crisis has eased somewhat with a greater percentage of cash allowed to be withdrawn.
"I think most institutions are feeling far more confident in the short run the fund will be there for what its needs are," Hamill said. "The remaining question on everyone's mind is exactly when the remaining balance in the account will be available."
The fund provides returns slightly above U.S. Treasury bills. About 85 percent of the fund was invested in high-quality commercial paper from blue chip companies, while the rest is in securities backed by mortgages and other assets, Luke said.
Amid the housing industry slump and turmoil affecting banks and credit markets, such investments have become increasingly unpopular as investors seek safer options like Treasury bills.
Commonfund said recently volatile markets have hurt the 15 percent to 20 percent of the Short Term Fund's portfolio held in mortgage- and asset-backed securities.
There have been no defaults in the fund's portfolio so far, Luke said.
"Credit markets have frozen, which has made trading of even the highest quality short term financial assets impossible at virtually any reasonable price," Commonfund wrote in a letter to clients Wednesday. "In light of these markets, we believe that the trustee feared that a sudden increase in redemptions could force a liquidation of securities in a frozen market and decided to take pre-emptive action."
Commonfund said it pledged $50 million of its corporate reserves in April to back the fund.
Fay said Wachovia's decision was not affected by last week's announced $2.1 billion deal for Citigroup to buy Wachovia's banking operations.
Wachovia's decision to slowly liquidate the fund is designed to prevent a rush by investors. When a fund sees such a rush, fund managers must sell assets — typically at a loss when it must be done quickly, and especially amid the recent market turmoil.
A slow liquidation helps protect investor returns and ensure each investor would be treated equally.
A rescue package approved by the Senate late Wednesday would let the government spend billions of dollars to buy bad mortgage-related securities and other devalued assets held by troubled financial institutions. If successful, advocates say, that would allow frozen credit to begin flowing again and prevent a serious recession.
By the end of the year, investors in the Short Term Fund will be able to withdraw at least 57 percent of their money, Luke said. Asked if investors will ultimately get all their money back, Luke said, "We certainly expect that."
Commonfund is working with the colleges and schools to help them find alternative sources of financing, Luke said.
"We feel terrible for them," Luke said. "We want to help them. We're working very hard to do so."
Bethany College — a Lutheran school in Lindsborg, Kan., with 600 students and a $12 million budget — has $700,000 invested in the fund.
"Obviously we weren't planning on withdrawing all at once," said Aubrey Streit, a spokeswoman. "We're just re-evaluating our plan for how we will work with the cash flow over the course of the next academic year."
Bethany College is not in a state of panic, Streit said, but she noted that the investment was a significant part of its budget.
"It wasn't something we expected," Streit said. "It really makes it real to see the financial impact coming here."
Grinnell College in Iowa had about $4.8 million in the fund, but was able to withdraw 34 percent, said Russell Osgood, the college's president. With a $1.5 billion endowment, he was not worried.
AP business writer Mark Jewell in Boston contributed to this report. Source: AP News
One Response to “Liquidity crisis for colleges?”
Christopherson Says: October 2nd, 2008 at 7:14 pm
I’ve already heard from numerous sources that UA will be a lot harder to be accepted into now that they’re at an all time high of 27,000+ students. I imagine the economy crisis is only playing into the university officials’ plan.
The Bailout Bill Has Gone Back To The House Providing Tax Breaks, An Increase In FDIC Insurance, And A Restatement Encouraging Suspending Fair Value Accounting Provided
James Rowley and Nicholas Johnston Bailout Bill Sent Back to House After Senate Passage (Update2) report that "The Senate also sweetened the (bailout) measure for Republicans by authorizing the government's purchase of troubled assets with a $149 billion package of tax breaks. They would spare 24 million households from a $62 billion alternative minimum tax and extend $17 billion in benefits to companies that produce alternative energy.
And added to the rescue plan this week is a temporary increase in the limit on federal deposit insurance to $250,000 from $100,000 aimed at discouraging people from pulling their money out of banks.
The Senate bill also reiterates the U.S. Securities and Exchange Commission's authority to suspend an accounting rule that bankers and other corporate executives say exacerbates their troubles; as indicated in the Elizabeth Williamsonand Kara Scannell Wall Street Journal article Momentum Gathers to Ease Mark-to-Market Accounting Rule
The so-called fair-value standard requires companies to review assets and report losses if their values decline. Lawmakers, the American Bankers Association and companies including American International Group Inc. have urged the SEC to suspend or ease the rule, saying it forces firms to report deeper losses than needed on assets such as subprime mortgages.
Jesse Westbrook of Bloomberg in SEC, FASB Resist Calls to Suspend Fair-Value Rules (Update2) reports that "The U.S. Securities and Exchange Commission probably will resist calls to suspend the fair-value accounting rules that some members of Congress blame for exacerbating the global financial crisis, people familiar with the matter said.
The SEC and Financial Accounting Standards Board today issued ``clarifications'' on how banks should interpret existing rules requiring them to review assets each quarter and report losses if values decline. A moratorium isn't being considered, said the people, who declined to be identified because the plan hasn't been completed.
Congressmen, banking lobbyists and companies including American International Group Inc. have urged the SEC to suspend fair-value accounting, saying it forces firms to report losses they never expect to incur. Federal Reserve Chairman Ben S. Bernanke and other proponents say removing the rule would erode confidence that firms are owning up to losses.
``In the past couple of weeks, fair-value accounting has been under attack,'' JPMorgan Chase & Co. analyst Dane Mott wrote in a report today. ``Blaming fair-value accounting for the credit crisis is a lot like going to a doctor for a diagnosis and then blaming him for telling you that you are sick.''
SEC spokesman John Nester declined to comment. FASB spokesman Neal McGarity didn't return a phone call seeking comment.
House Rejection
Representative Todd Tiahrt, a Kansas Republican, said the House probably would have approved a $700 billion bailout of financial companies yesterday had the legislation included a suspension of fair value accounting. The House rejected the measure 228-205.
It would have passed ``easily'' if the rules had been suspended, Tiahrt, who opposed the legislation, said today in a Bloomberg Television interview.
Bernanke said in Sept. 23 testimony before the Senate Banking Committee that if regulators repeal the rules, ``nobody knows what the true mark-to-market price is.''
Fair value rules require companies to determine how much assets are worth based on what they could expect to sell them for on the open market.
``Suspending the mark-to-market prices is the most irresponsible thing to do,'' said Diane Garnick, who helps oversee more than $500 billion as an investment strategist at Invesco Ltd. in New York. ``Accounting does not make corporate earnings or balance sheets more volatile. Accounting just increases the transparency of volatility in earnings.''
`Unrealistic Prices'
Anne Canfield, executive vice president of the Consumer Mortgage Coalition, counters that businesses have been forced to ``mark down their assets to unrealistic fire-sale prices,'' because trading has dried up. Canfield, whose group represents mortgage lenders, urged the SEC to suspend fair-value rules ``immediately'' in a Sept. 29 letter to the agency.
The SEC and FASB, in today's statement, encouraged companies to rely more on their own judgments, such as expected cash flows, in determining the current value of assets that aren't trading. The regulators also said price quotes provided by brokers when markets are frozen may not be the most reliable way to determine how much securities are worth.
Norwalk, Connecticut-based FASB, which writes U.S. accounting rules, is preparing ``additional interpretive guidance on fair-value measurements'' to be released this week, the SEC said. FASB will discuss fair-value accounting at its board meeting tomorrow.
Bankers Association
The American Bankers Association, a trade group representing lenders that has lobbied the SEC over fair value accounting, praised the agency's clarifications, saying they will ``help auditors more accurately price assets,'' according to a statement released today.
The collapse of the subprime-mortgage market has contributed to more than $500 billion of losses and writedowns at global financial companies. Treasury Secretary Henry Paulson is seeking authority from Congress to ease the crisis by buying mortgage-securities and other assets from banks.
U.S. Senate leaders and President George W. Bush vowed today to revive the $700 billion financial-rescue plan after the House rejected the legislation.
House Plans Second Vote On $700 Billion Bailout
Friday October 3, 6:40 am ET, Julie Hirschfeld Davis of the Associated Press writes that converts in the House are "reluctantly embracing" $700 billion bailout ahead of today's make-or-break 2nd vote.
Black lawmakers said personal calls from Democratic presidential nominee Barack Obama helped switch them from "no" to "yes," as Republicans and Democrats alike said appeals from credit-starved small businessmen and the Senate's addition of $110 billion in tax breaks and other sweeteners had persuaded them to drop their opposition.
Rep. John Lewis, D-Ga., told a closed-door meeting of House Democrats that he would support the bill after speaking with Obama about it.
Congressional leaders "worked over" wayward colleagues wherever they could find them.
Rep. Bobby Rush, D-Ill., also said Obama was asking him to reconsider his vote. "I'm seriously listening," Rush said
The Investment Application
The SEC has stated that the fair value accounting rules have been suspended. And the bailout legislation is likely to be passed with a statement to the SEC that it suspend fair value accounting, which is redundant given that it has already suspended the rules.
Yet, the suspension of fair value is modern day Enron accounting, and is obscuring the true market value of their assets in fund values and in debt instruments, intensifying the credit crisis day-by-day. Liquidity is freezing up. This means there is no liquidity to grease the wheels of the economy.
There is coming ever increasing credit gridlock where companies will be unable to meet payroll and pay debt as it comes due, as the funds they rely on do not honor redemptions.
When the legislation passes, and is signed into law by the President, then the US government will be stuck with buying assets that are market to fantasy. And I can assure you that the Federal Reserve is going to be buying assets primarily from chrony organizations, such as JP Morgan and Morgan Stanley, and from only those organizations which if they fail would hurt JPM and MS.
What this means is that the assets, that is the debts, on the books of massive numbers of banks and others, will really be reinforced as worthless.
The passage of the legislation will mean a write down of commercial debt instruments across the board with the longer out, getting a greater marketplace haircut.
Debt ETFs, such as LQD, HYG, CFT and EMB will continue to loose value; and the principal value of the tax free municipal bond mutual funds like USSTX, will continue to fall, as interest rates rise. And the municipal bond ETFs such as MUB and TFI will continually go lower as well.
The suspension of fair value accounting means an ever increasing flight of capital out of the municipal bond market, and thus will soon cause a shut out of municipalities from the credit markets.
The suspension of fair value accounting means companies will find no buyers of corporate debt; and thus, a closure of lending markets.
We are quickly moving from a situation where the US Treasury Notes and Paper is desirable, to a situation where only the US Government Debt will be honored, that is bought and sold!
In other words, only US government debt will be held as valuable, because fair value accounting rules have been suspended by both the SEC and by congressional mandate.
I relate that while Regional Banks, IAT, are currently up 22% since the US Dollar stock rally began, July 14, 2008, when the yen carry traders, sold oil, USO, and commodities, RJI, to go long the banks, the facility of TARP provided under the Emergency Economic Stabilization Act of 2008, that is EESA, is unlikely to be of much help to most regional banks. The authority and facilities given to the Federal Reserve Chairman by the Paulson-Bush-Pelosi bailout legislation provide a rescue of derivative laden and threatend JPMorgan, Citigroup, Bank of America and Morgan Stanley, and not of the community and smaller banks.
If one is invested in these, it's best to sell out now of all Regional Banks, as they will be falling in value once the legislation is passed.
The 3 month on going Yahoo Finance chart of IAT, compared to ITB, and IYR, shows the 22% rise. Here is the chart showing the 22%.
Yes, pull out as my perspective is much the same as that of Joshua Crown in The Accounting Rule You Should Care About where he relates: A change of course!
Tuesday afternoon, the SEC and FASB seemed to change course on the rule, as they published new guidance to firms. The two organizations said when the market for a security disappears, it is now allowable to arrive at a value using "estimates that incorporate current market participant expectations of future cash flows, and include appropriate risk premiums, is acceptable."
In plain English, banks may not be forced to take huge writedowns on investments that lost all their value. But the guidance is just that: guidance. The SEC and FASB suggested that more concrete rule changes could come later.
While the possible end of mark-to-market might please critics of the rule, it doesn't satisfy everybody.
Some financial experts argue that even though banks and Wall Street firms may be able to make their balance sheets look better if the rule changes, these companies will be less attractive to investors because there isn't as much information about their true financial condition.
"The garbage is on the books and no one wants to admit the original error of purchasing this class of assets," said Barry Ritholtz, CEO of Fusion IQ, a research firm.
Ritholtz said mark-to-market accounting forces banks to honestly disclose what they own and how much those investments are worth. Changing the rule would make it tougher to come up with a bank's real value.
"I would advise our clients and the investing public that owning any financials that failed to disclose their holdings accurately is no longer an investment. It is pure speculation, with more in common to spinning a roulette wheel," he said.
Gold Is The Safe Haven
I believe a run on stock brokerages is coming soon; and I suggest that one take one's money out of brokerage accounts, and that one buy gold, even though gold can easily fall from its current $840 to $825, $800 or $775, with a falling EURJPY.
And the gold ETF, GLD, could very easily fall to $77.50.
While bank accounts will have higher FDIC limits, I want something that is tangible, that I can secure, that I can personally own and have a large degee of personal control over.
I recommend diversification of investment in gold in four locations immediately because of financial system instability and lack of liquidity: the gold ETF, GLD, directly through streetTRACKS Gold Trust, and not in a brokerage account; two BullionVault, three GoldMoney; and four a limited number of gold coins.
I am simply a blogger who communicates what I see as an investment demand for gold; I suggest that one consult with a licensed investment professional before making any investment decisions.
Helpful Interactive Charts For Gold
The Yahoo Finance ongoing chart of GLD relative to the EUR/JPY and the USD/JPY, provides fascinating insights into the interplay of gold and the two major currency pairs.
Gold, $GOLD.
The gold ETF, GLD.
The US Dollar, $USD.
US Treasuries, TLT
The Ten Year US Government Note, $TNX
The on going monthly MSN Finance chart of the gold ETF, compared to world stocks, EFA, and US Stocks, VTI, and US Treasuries, TLT
The ongoing five day Yahoo Finance chart of gold, GLD, relative to the US Dollar ETF, UUP, and the Euro, FXE, and oil, USO
The on going five day Yahoo Finance chart of the gold ETF, GLD, compared to FXE, EFA, and EEB
The on going five day Yahoo Finance chart of the gold ETF, GLD, compared to IWM, and SPY
The on going five day Yahoo Finance chart of the gold ETF, GLD, compared to FXE, USO, and RJI
The ongoing ten day MSN Finance chart of EUM, compared to TWM, SDK, and SFK
The the ongoing five day Yahoo Finance chart of EUM, compared to TWM, SDK, and SFK
The ongoing five day Yahoo Finance chart of the yen, compared to gold and the world's major currencies
Gold relative to world stocks: GLD:EFA
Gold relative to US Stocks: GLD:VTI
Gold relative to the euro: GLD:FXE
Gold relative to world currencies: GLD:DBV
Gold relative to oil: GLD:USO
Suggested Reading And Things To Reflect On
LIBOR Rates Pushing World To Hyper-inflation? Is disregard for fair value rules of accounting going to create massive hyperinflation?
The Ted Spread as of the writing of this article it has gone into uncharted territory at 3.83, that may be a new high; this is like throwing a wrench into a working machine; all I can relate is that the global financial system is going to come to a screeching break down very, very soon.
KeNo's Housing And Economic Portal provides a section of various state, municipality and small businesses being hurt by the credit crunch.
The SEC May Get New Authority Over Fair Value Accounting Two little noticed provisions are Sections 132 and 133, which represent a significant and potentially far-reaching intrusion by Congress into the process by which accounting principles are formulated and implemented. Section 132 gives the SEC the authority to “suspend … Statement Number 157 of the Financial Accounting Standards Board, FASB.
Stop Enronization Of Banking The current bailout legislation does not instill or create trust in wall street and banking.
Goldman Is Getting The Best Of The Credit Crisis Goldman Sachs opponents have been vanquished and bad bets wiped away. Given that its charter has been changed to the status of a bank holding company, it will be the last bank standing.