In today’s Financial Times “In comments sent to FASB, the CFA Institute, trade body for more than 80,000 anlaysts and fund managers, said the new rules would damage the credibility of the rulemaker and US accounting standards generally. Investors will not be willing to commit capital to firms that hide the economic value of their assets and liabilities.”
Do you have the article link?
I guess the CFAI wants the more conservative valuation, so that we are sure about the future ahead and valuation of these assets.
Wow, CFAI has more balls than FASB!
The FASB said they are going to get more disclosures in the 157 standard. They are going to propose disclosures that will force companies to disclose for the three levels in FAS 157 the types of assets for debt and equity, the structrured securites at each level, by vintage, etc. While I agree the impairment rules and inactive market rules are a cover up, I think these enhanced disclosures will be awesome. They are exactly what the investors are waiting for. The companies on one hand will enjoy the benefits of the new rules – less impairments and unrealized losses – but on the other hand the extra disclosure will expose them more than they are now. CFA institute’s comments were made before the FASB board met today.
Well, if they do truly disclose everything, the institution investors will then price their assets their own way in their internal analysis. So it won’t help the stocks at all. I think FASB will give the banks a lot of leeway for disclosures. Otherwise, there is no point in having this rule.
hahah…just watch the finger pointing when a wave of class-action retail investor lawsuit on how managment mislead investor about company’s asset value. FASB is digging a hole for themselves.
Here. Actually, CFA is the trade body for more than 100,000+ analysts http://www.ft.com/cms/s/0/339b6e8c-1f8c-11de-a7a5-00144feabdc0.html?nclick_check=1
CFAdummy Wrote: ------------------------------------------------------- > In today’s Financial Times > > “In comments sent to FASB, the CFA Institute, > trade body for more than 80,000 anlaysts and fund > managers, said the new rules would damage the > credibility of the rulemaker and US accounting > standards generally. > > Investors will not be willing to commit capital to > firms that hide the economic value of their assets > and liabilities.” I completely disagree with the CFAI. The idea that we should have a completely free market, predicated upon correct price rationalization and valuation, is a fairy tale. Humans are irrational and fearful, causing stupidity in prices for the short term. Sure, it works both ways, stupidity on the way up and stupidity on the way down, but that doesn’t mean we should rip the world apart in the name of “transparency”.
True, but is it any more rational to turn over the judgment to individual banks. Essentially the banks are saying, “the market is wrong, WE know the real price and will mark accordingly”. But then again, they don’t exactly have a great track record of “really knowing the right price” - if they did, we wouldn’t be in this mess.
nerdattax Wrote: ------------------------------------------------------- > True, but is it any more rational to turn over the > judgment to individual banks. Essentially the > banks are saying, “the market is wrong, WE know > the real price and will mark accordingly”. But > then again, they don’t exactly have a great track > record of “really knowing the right price” - if > they did, we wouldn’t be in this mess. What is the “market” when even the most liquid assets have extreme difficulties in setting correct and realistic prices? I see the core problem with the CFA and most finance schools is that they have been so ingrained with the idea that the “market” can do no wrong that we should utterly believe and trust the “market” to guide us. However, the “market” is full of greedy, fearful, and irrational people and that irrationality is only magnified during times of crisis. This leads to misplaced trust. Trust in an irrational market is just as, if not more, dangerous than trust in a bank, especially one that has auditors and regulators (and investors) looking at things. Heard mentality can undermine a system far more quickly than the slow rot of crappy accounting and under regulation. That isn’t to say that we should trust people. It is a fine balance between regulation, transparency, and rationality. We stepped over the balance, in the favor of greedy bankers, for the prior 6 years to 2007. Then we stepped over the other side of the line in the name of “transparency” in 2007. You cannot undermine the entire system for “transparency” when that transparency is nothing more than a negative feedback loop. When it comes to illiquid investments, throwing them to the wolves and saying “have at it hedge funds, set whatever price you want and we’ll mark *ALL* assets to that price” is silly.
Well, it is not that these these assets are illiquid, they were quite liquid pre-burst. It is because the demand is very very low now. When demand is low, the price should be low.
ymc Wrote: ------------------------------------------------------- > Well, it is not that these these assets are > illiquid, they were quite liquid pre-burst. It is > because the demand is very very low now. When > demand is low, the price should be low. They weren’t all that liquid, not compared to stocks. Sure, banks have bond trading floors, but there is no exchange. I know of one company where, in 6 years of securitization, pre-bust, they had *one* bond trade. Those bonds used to price at S+60, now they price at S+400. All because…why? Ohh, that’s right, new bonds from that company go out at S+400, so *ALL* bonds like that have to price at S+400, despite the fact that NONE trade. When demand is irrationally low, should everybody mark every one of their assets to that irrationally low price? It’s like having a house in the hamptons that’s $10mm. The house next door to you was worth $10mm. In the downturn all houses went down 10%, yours and your neighbors went down to $9mm. Then, suddenly, your neighbor *HAS* to sell his house. Let’s say he has to pay another creditor some money and must sell the house to get the money. So he sells it to the only person who will buy it. That person knows that the house is worth far more, but since the guy is desperate, he knows he can get an awesome deal. So he offers $1mm. The guy takes it. Is your house now worth $1mm? Lets say you had an $8mm mortgage on it. If so, should your mortgage company come to you and say that you must put down $7.2mm to get them back to 20% LTV? What if you don’t have that money? So what do you do? You find somebody else to buy it. Now, since it is a “trend” (two houses out of 500), people know you’re desperate. Somebody comes along and says, “ok, I’ll buy it for $800k”. Now, all of those houses are worth $800k? We can go on and on with this example. When does it become enough to know that irrational and illiquid markets driving the prices of ALL assets of similar nature is insane? You guys are way too focused on “transparency” and “efficient markets” that you’re more than willing to rip the world apart to gain your precious analyst goals. That naivete is striking and very worrisome. Shooting your dick off to show the world you’re a man is counter productive, isn’t it?
“Ohh, that’s right, new bonds from that company go out at S+400, so *ALL* bonds like that have to price at S+400, despite the fact that NONE trade.” New bonds going out sure sounds like a trade to me. Your house metaphor is not apt. Just because you put “transparency” in quotes doesn’t make it a bad thing, “spierce”. Transparency doesn’t rip the world apart, crappy assets do.
NakedPuts Wrote: ------------------------------------------------------- > “Ohh, that’s right, new bonds from that company go > out at S+400, so *ALL* bonds like that have to > price at S+400, despite the fact that NONE > trade.” > > New bonds going out sure sounds like a trade to > me. Your house metaphor is not apt. Just because > you put “transparency” in quotes doesn’t make it a > bad thing, “spierce”. Transparency doesn’t rip > the world apart, crappy assets do. New bonds are not the trading of old bonds, especially when they are sent to the same old investors. You know that I meant trading on the secondary market, but go ahead, keep being difficult. The house metaphor is perfectly correct. M2M screws over those who hold illiquid assets that are priced by even single investors/sellers. I put it in quotations because the transparency gained is nothing more than an illusion. How about we just make all corporate board meetings transparent. After all, investors need to know what’s going on, right? Transparency taken too far does rip the world apart.
“New bonds are not the trading of old bonds, especially when they are sent to the same old investors. You know that I meant trading on the secondary market, but go ahead, keep being difficult.” You’ve got to be kidding me. New issues aren’t perfect, but they’re a reasonable comp. Look at GE. Do AAA companies need issue 10% preferred stock with warrants, a la Buffet? Of course not. So either they’re not triple A, or management (and their bankers) are morons. I’m pretty sure it’s not the latter. Something is only worth what someone else will pay for it. Go get me a bid, or get lost with your S+60 mark. Just because the market values risk differently than you do doesn’t mean get to mark your assets where you value the risk. The housing metaphor is terrible. What mortgage requires you to maintain 80% LTV? What distressed sale goes out at 10 cents (in the housing market)? M2M might screw those running leveraged FI books, but that’s a risk of the trade, not a probably with the system. As a banker said to me recently: “I’ve got a great new funding mechanism for you. It’s called equity. Raise some”. " How about we just make all corporate board meetings transparent. After all, investors need to know what’s going on, right? " Awesome strawman. You’ve argued on the internet before, haven’t you? Nice try. “Transparency taken too far does rip the world apart.” Obviously. I don’t think they should have an Oval Office feed on CSPAN. But pretty much every time management is given any discretion in their financial filings, they abuse it. I fail to see why this example should be any different.
Well, as long as the disclosures 1) tell me what the current market price is, and 2) tell me how the alternate pricing model works, and 3) lets me be the judge of which one is more reasonable, I’m more or less ok with that. The problem is that the difference in these numbers will determine whether the bank should be bankrupt or not and whether regulators will let the bank lend more money or not, so it’s not just a question of how *I* value their balance sheet, but how the regulators see it, and what instructions they have.
As long as there is full disclosure on how things are valued then whats the problem? We all have calculators we can decide for ourselves. Just because some accountant says something is worth x doesn’t mean I have to believe that. Just becasue an analyst or a rating agency says something that just one opinion. I don’t buy that markets are efficent. Over the long term it can be the most efficient tool we have but the market is a collection of humans and from what I know they are driven by fear, greed, ego and sometimes commonsense. They tend to be imperfect at best. Just like I didn’t believe the rating agencies and still can’t believe they haven’t been shut down. But you had to know that the CFA body would have to comment like this. The only thing that should be positive is a stop to the negative feedback loop of accoutants being forced to use firesale prices on illiquid assets to save themselves and thus leading to the decrease in RAC and the corresponding requirement to raise capital in depressed market because of the negative feedback loop. Otherwise the value of the underlying company assets is not going to change because of a FASB ruling or a CFA comment.
Any idea how the new FASB treatment might affect our interpretations on the exam? Will they just ignore this entirely, or should we re-learn accounting for available-for-sale and held-for-trading securities as amortized cost rather than fair value. The whole thing seems crazy to me… I don’t see how this is going to help anything, besides capital requirements. Here we are in earnings season and now most of the banks will be reporting miraculous earnings for 1Q, which will be completely fabricated based on reversals of credit write-offs, or at least a failure to continue to write these f’ers down. I still think we’ve got a lot of purging to do. This is just the calm before the storm.