House rejects Bailout; DOW drops 650

[Aeson]

Actually that isn't true. Level 1 assets are marked to market. Level 2 and 3 are not. Level 2 is an indirect mark to market, and level 3 is a mark to... fantasy (in regards to what the paper would fetch if sold).

[Kidlicious]

Originally posted by Patroklos


This is the case now and has been since Enron and co, and is one of the leading causes of the current problems.

That's right. Mark-to-market is less reliable and therefore allows more creative accounting. Mark-to-market became popular in the 80's. Enough said.

[Patroklos]

hmmmm...what do the various levels refer to?

[Arrian]

Originally posted by Colonâ„¢


That, as usual, extremists from opposite sides actually have in lot in common?

[Kidlicious]

Mark-to-market should be used when it reports a lower value for the asset, and historical cost should be used otherwise. That will create a more stable system.

[Aeson]

It's accounting rules to determine "fair market" value.

Level 1 are assets which there is a market for. Not sure if it's highest outstanding bid, or last trade. (Probably last trade on the most favorable exchange.)

Level 2 are assets which there are market inputs for, but no direct valuation in the market. Options for instance, which are allowed to be valued given probabilities, since they won't pay off or be worthless until a given date. (I don't have too much of a problem with this, though I think using current bid, even if no bid, when available would be best to avoid as many exploits as possible. Not sure what all fits in here, some of it may not have actual exchanges... but stock options do.)

Level 3 are assets which there is no market for, and in-house models are used to determine the value. (This could never... ever... ever be misused. Nope. )

[Kidlicious]

"The SEC's guidance on Tuesday, came on the last day of the third quarter for most U.S. companies, allowing them to incorporate the changes in their next round of financial statements.

In a document on the matter, the SEC reaffirmed that management's internal assumptions can be used to measure fair value when relevant market evidence does not exist."


This happened yesterday.

http://www.newsdaily.com/stories/wat...ccounting-sec/



That's bad news IMO.

SEC gives banks more leeway on mark-to-market

--------------------------------------------------------------------------------

By John Poirier
and Emily ChasanPosted 2008/09/30 at 8:30 pm EDT
WASHINGTON, Sep. 30, 2008 (Reuters) — U.S. securities regulators on Tuesday gave the financial industry a reprieve from marking hard-to-value assets down to fire sale prices, throwing a lifeline to an industry beset by strained credit markets and the latest round of bank failures.


Traders make sure their final trades are processed just after the closing bell on the floor of the New York Stock Exchange September 30, 2008. REUTERS/Brendan McDermid

U.S. stock market added to gains on the news, in hopes that regulators' new interpretation of fair value, or mark-to-market, accounting rules, will slow or reverse the heavy flow of mortgage-related losses on banks' balance sheets.

In the new guidance, first reported by Reuters, the U.S. Securities and Exchange Commission reminded financial services firms that they don't need to use fire sale prices when evaluating their hard to price assets.

"This is a significant first step and adds stability, confidence, and liquidity within the capital markets," said Steve Bartlett, president and chief executive of The Financial Services Roundtable. "By clarifying how to treat assets in an uncertain market, the SEC is continuing to provide transparency to investors and helping institutions to provide credit in periods of market stress."

U.S. accounting rule maker, the Financial Accounting Standards Board said on its Web site on Tuesday that it would change the agenda for its Wednesday meeting to focus on fair value accounting. The board is contemplating issuing additional guidance through a FASB staff position as soon as Wednesday, according to a person familiar with the matter.

MARK-TO-ESTIMATE

The SEC's guidance on Tuesday, came on the last day of the third quarter for most U.S. companies, allowing them to incorporate the changes in their next round of financial statements.

In a document on the matter, the SEC reaffirmed that management's internal assumptions can be used to measure fair value when relevant market evidence does not exist.

U.S. accounting rule makers assume that the factors used to come up with fair values are based on an orderly transaction between willing market participants. The SEC document said that "distressed or forced liquidation sales are not orderly transactions."

"This guidance will help auditors more accurately price assets that are difficult to value under current market conditions," said Edward Yingling, president and chief executive of the American Bankers Association, whose group has been among several pressuring the SEC to clarify the rules for months.

Under U.S. accounting rules, assets can be valued based on a simple price quote in an active market. But the hardest to value assets are often based entirely on management's best estimate derived from mathematical models.

However, as credit markets seized up this year, many banks were forced to rely on models to value complex mortgage securities that used to trade in more active markets. Critics have complained that accountants forced banks to base their values on fire sale prices in illiquid markets instead of the so-called level 3 input, or unobservable factors, such as the mathematical models used to evaluate their securities.

The SEC's guidance says that sometimes the level 3 inputs may be more appropriate than the so-called level 2, or observable factors.

"In essence, the SEC wants to stop the avalanche of declining prices," said Tom Sowanick, chief investment officer at Clearbrook Financial. Sowanick said that the new guidance should allow banks to rely more on their own assumptions when they determine fair value rather than the distressed sale prices occurring in the markets.

But fair value accounting has been popular with many investors who said it greatly increased transparency about the risks banks are facing.

"This letter (SEC document) could be titled, pick a number, any number, as it gives bankers great leeway in choosing what numbers they will give to investors," said Lynn Turner, who served as chief accountant at the SEC from 1998 through 2001.

Others, however, said that the changes have not gone far enough.

In a letter to SEC Chairman Christopher Cox on Tuesday a bipartisan group of more than 60 U.S. lawmakers urged the SEC to suspend the fair value accounting rule immediately.

"Fair value accounting is a utopian dream that ran into the reality of business and litigation," said Chris Whalen, co-founder of Institutional Risk Analytics, which provides ratings and analytical tools to investors.

"Equating an opinion with a market price is crazy," he continued. "It doesn't matter who gives the opinion -- the auditor is still going to say to the client, 'Why don't you write it down?'"

Under U.S. accounting rules, a "Level 1" asset can be marked-to-market based on a simple price quote in an active market. However, the price of a "Level 2" asset is "mark-to-model" and is estimated based on observable market prices and inputs. A "Level 3" asset is so illiquid that its value is based entirely on management's best estimate derived from complex mathematical models.

(Reporting by John Poirier, Emily Chasan, and Rachelle Younglai with additional reporting by Jennifer Ablan; editing by Carol Bishopric)

[Aeson]

Damn... I wish they'd remove "mark to market" for my computer. (Then have the Treasury buy it from me. ) It's really worth the $1600 that went into it. Really. Nevermind that I could probably only get $600-800 for it on Ebay.

[Kidlicious]

You guys know what's happening don't you? The SEC is using creative accounting themselves.