Could An Accounting Rule Be At The Center Of The Financial Crisis?
Sunday, 12. October 2008, 16:47:41
Oh, the trouble caused by fair value, or "mark-to-market" accounting. First, it was at the center of the Enron accounting scandal (here), when that company used this accounting rule to manipulate its earnings on energy derivatives contracts (unrealized gains on these contracts constituted one-half of the company's profits in 2000).
The mark-to-market accounting under FASB 157 is 'the first of two lynchpins to understanding the factors' that have created credit gridlock, that is a lending gridlock, and the liquidity injections made via TAF, TSLF, PDCF, as well as emergency loans, the lowering of the US Central Bank rate, TARP, as well as the nationalization of home loan lending organizations Fannie Mae, FNM, and Freddie Mac, FRE, and nationalization of real estate ownership by the US Government under FHFA under James Lochart, the purchase of AIG Insurance, as well as the new CPFF facility.
The fair value accounting, also known as "mark-to-market," required by FASB 157 for illiquid mortgage-backed assets, held banks and other financial institutions accountable to carry these assets on their balance sheets at their genuine value; however, the AICPA had a summit and advised their members to disregard genuine value.
So while there was some write down by corporate management of the mortgage backed securities on the financial organizations books, there was no where near the write down to market required by FASB 157.
On September 11, 2008, the stock maketplace called into question the high and overstated value of the assets on the bank's books and refused to fund new stock issues, that is new capital issues, by the banks. So, on 9-11-2008, the banks stopped lending, and declined to underwrite commercial paper. The banks realize that they are simply walking dead men; biding their time, until the government shuts them down for capital impairment. This caused an outward ripple to the municipal bond market place as well: the municipal bond market closed to underwriting new debt.
The investing public got spooked and there was a panic run on money market funds, the MMFs, several of which went under due to redemptions; and some money market funds and mutual funds are not honoring investors calls for share redemtpion, until a more stable market place prevails. Money market funds, are purchasisng only short term US Treasuries and have sold their corporate debt.
A run on corporate debt is now underway, resulting in a sell off of debt instruments across the board. Companies lack the short term capital that commercial paper provided, and are going to shutter as they have no operating funds for payroll, cutting accounts payable checks, and purchasing services or raw materials, let alone money to roll over debt as it comes due.
The bond marketplace has declared a defacto interest rate hike, as is seen in the rate on the ten year govenment note, $TNX, rising and the value of the Treasury ETF, TLT falling.
The municipal bond market place has imploded and municipal bonds are falling lower by the day, as a run on state and municipal bond ETFs and mutual funds is underway. States and cities are going to lay off, and reduce services to basic law enforcement only.
The SEC and FASB have provided additional guidance in the application of the mark-to-market rules in the current illiquid market for mortgage backed assets hoping to lessen the "negative feedback loop" and allow companies to reduce write-downs on assets where there has been a distressed sale of same or similar assets in the market. The SEC tells companies that management's internal assumptions on the present value of future cash flows of an asset can be used to value an asset when market for the asset does not exist. In other words, the fair value accounting rule of mark-to-market has been thrown out the window.
The Mortgage Bankers Association issued a press release on October 1, 2008 MBA Applauds SEC and FASB for FAS 157 Clarification applauding the new guidance from the SEC and FASB, particularly the endorsement of the use of discounted cash flow to fair value assets where there is no active market. The press release states that “FAS 157 was never test driven in a market where the only transactions occurring are distressed sales. In such an environment, FAS 157 was only exacerbating the market illiquidity. This announcement should have an immediate impact allowing companies to reflect the true value of their mortgage assets and increasing capital and liquidity in today's stalled credit markets.” In doing so the Mortgage Bankers Association is participating in a deception.
In my article A Lending System Cardiac Arrest Means Economic Desolation, I relate that a cardiac arrest in lending has occurred, resulting in a lending gridlock. The banks in failing to lend, have set in motion a series of events caused a financial meltdown, that will result in catastrophic failure of the worldwide financial system, with epicenter in the United States.
The settlement of credit default swaps such as Lehman Brothers is 'the second lynchpin to understanding the factors' that have created credit gridlock, that is a lending gridlock, and the liquidity injections made via TAF, TSLF, PDCF, as well as emergency loans, the lowering of the US Central Bank rate, TARP, as well as the nationalization of home loan lending organizations Fannie Mae, FNM, and Freddie Mac, FRE, and nationalization of real estate ownership by the US Government under FHFA under James Lochart, as well as the new CPFF facility.
Related
Close to 100 comments on FASB 157 Fair Value Proposal
The mark-to-market accounting under FASB 157 is 'the first of two lynchpins to understanding the factors' that have created credit gridlock, that is a lending gridlock, and the liquidity injections made via TAF, TSLF, PDCF, as well as emergency loans, the lowering of the US Central Bank rate, TARP, as well as the nationalization of home loan lending organizations Fannie Mae, FNM, and Freddie Mac, FRE, and nationalization of real estate ownership by the US Government under FHFA under James Lochart, the purchase of AIG Insurance, as well as the new CPFF facility.
The fair value accounting, also known as "mark-to-market," required by FASB 157 for illiquid mortgage-backed assets, held banks and other financial institutions accountable to carry these assets on their balance sheets at their genuine value; however, the AICPA had a summit and advised their members to disregard genuine value.
So while there was some write down by corporate management of the mortgage backed securities on the financial organizations books, there was no where near the write down to market required by FASB 157.
On September 11, 2008, the stock maketplace called into question the high and overstated value of the assets on the bank's books and refused to fund new stock issues, that is new capital issues, by the banks. So, on 9-11-2008, the banks stopped lending, and declined to underwrite commercial paper. The banks realize that they are simply walking dead men; biding their time, until the government shuts them down for capital impairment. This caused an outward ripple to the municipal bond market place as well: the municipal bond market closed to underwriting new debt.
The investing public got spooked and there was a panic run on money market funds, the MMFs, several of which went under due to redemptions; and some money market funds and mutual funds are not honoring investors calls for share redemtpion, until a more stable market place prevails. Money market funds, are purchasisng only short term US Treasuries and have sold their corporate debt.
A run on corporate debt is now underway, resulting in a sell off of debt instruments across the board. Companies lack the short term capital that commercial paper provided, and are going to shutter as they have no operating funds for payroll, cutting accounts payable checks, and purchasing services or raw materials, let alone money to roll over debt as it comes due.
The bond marketplace has declared a defacto interest rate hike, as is seen in the rate on the ten year govenment note, $TNX, rising and the value of the Treasury ETF, TLT falling.
The municipal bond market place has imploded and municipal bonds are falling lower by the day, as a run on state and municipal bond ETFs and mutual funds is underway. States and cities are going to lay off, and reduce services to basic law enforcement only.
The SEC and FASB have provided additional guidance in the application of the mark-to-market rules in the current illiquid market for mortgage backed assets hoping to lessen the "negative feedback loop" and allow companies to reduce write-downs on assets where there has been a distressed sale of same or similar assets in the market. The SEC tells companies that management's internal assumptions on the present value of future cash flows of an asset can be used to value an asset when market for the asset does not exist. In other words, the fair value accounting rule of mark-to-market has been thrown out the window.
The Mortgage Bankers Association issued a press release on October 1, 2008 MBA Applauds SEC and FASB for FAS 157 Clarification applauding the new guidance from the SEC and FASB, particularly the endorsement of the use of discounted cash flow to fair value assets where there is no active market. The press release states that “FAS 157 was never test driven in a market where the only transactions occurring are distressed sales. In such an environment, FAS 157 was only exacerbating the market illiquidity. This announcement should have an immediate impact allowing companies to reflect the true value of their mortgage assets and increasing capital and liquidity in today's stalled credit markets.” In doing so the Mortgage Bankers Association is participating in a deception.
In my article A Lending System Cardiac Arrest Means Economic Desolation, I relate that a cardiac arrest in lending has occurred, resulting in a lending gridlock. The banks in failing to lend, have set in motion a series of events caused a financial meltdown, that will result in catastrophic failure of the worldwide financial system, with epicenter in the United States.
The settlement of credit default swaps such as Lehman Brothers is 'the second lynchpin to understanding the factors' that have created credit gridlock, that is a lending gridlock, and the liquidity injections made via TAF, TSLF, PDCF, as well as emergency loans, the lowering of the US Central Bank rate, TARP, as well as the nationalization of home loan lending organizations Fannie Mae, FNM, and Freddie Mac, FRE, and nationalization of real estate ownership by the US Government under FHFA under James Lochart, as well as the new CPFF facility.
Related
Close to 100 comments on FASB 157 Fair Value Proposal
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