Blawgletter has lately heard complaints -- especially from congressional folk -- about the Financial Accounting Standards Board's requirement that companies book their assets at their current fair value.
The gripers deem FASB No. 107, Disclosures About Fair Value of Financial Instruments (summary here), as a rigid mandate that handcuffs struggling banks. They complain that we ought not compel public companies owning suddenly illiquid instruments like collateralized debt obligations and asset/mortgage-backed securities to "mark to market" the value of the stuff. Because in some cases that would render the investing outfits insolvent. See, e.g., Lehman Brothers Holdings.
And yet we recall several years ago when the likes of Enron abused FASB No. 107 by recording huge profits on investments that never seemed likely to (and in the event didn't) produce any kind of positive return. Remember all those off balance sheet special-purpose entities?
FASB No. 107 requires mark-to-market accounting for many financial instruments, including your CDOs and ABSs. That means that FASB 107 compels the owners of financial instruments to value financial instruments at the price a willing buyer would pay.
Some now view the standard as unfair to banks that bought high-risk paper before the highness of the risk turned obvious even to outsiders. But they ignore the fact that, for years, mtm made those same banks' bubbly profits positively frothy. Mtm meant marking assets up and booking bigger profits and larger shareholders' equity.
Blawgletter thus lacks sympathy for anybody who says our current financial crisis resulted in even the least way from proper application of FASB No. 107. It happened instead from the Enronian sense that anything goes -- that companies may book asset gains as profits even though the gains were ephemeral and depended on an unsustainable speculative real estate bubble. People don't need an overhaul of FASB No. 107; instead they require its honest implementation.
If you don't believe us, go ask Lehman Brothers.
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