With stunning speed the bailout package seems to be coming back to Congress for a vote as early as Wednesday. The markets erased 50%-70% of their Monday declines on the hopes that the bailout has a real chance of getting through this time (despite substantial public dissent).
It's too early to say what the new bailout package will include but I'll try to provide some color on the plan tomorrow.
Rarely are accounting rules exciting or for that matter even vaguely interesting, but the SEC and the Financial Accounting Standards Board have caved to political pressure on one issue that needs to be addressed. Politicians have been on a rampage over the past week in an attempt to eliminate the mark to market rule. In summary, the mark to market rule says that you need to report the value of your assets as if you were to sell them today. Given the illiquid markets in many securities today, this means that many financial assets would have to be written down because they have a lower value 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.'' -Dane Mott , JPMorgan Chase & Co.
But despite calls to resist this change the SEC seems to be caving according to this article.
Under intense political pressure, regulators for securities and accounting standards this afternoon issued what they called a "clarification" to provisions that have come under fire from bank executives and some lawmakers for contributing to the credit crisis. Regulators said that the new guidance will help companies figure out the value of complex mortgage-related investments at a time when there are few trading partners willing to purchase them.
The three-page joint statement today from the SEC and the Financial Accounting Standards Board does not do away with fair value accounting provisions altogether. But it gives companies more leeway to employ estimates and their own judgment in many cases when they deem the market to be "disorderly" or seized by liquidity problems.
Let's say you invested your kid's college fund in Barry Bonds rookie cards for $50,000 in 2006. Now those cards are worth $2.33, but thanks to having "more leeway to employ estimates and your own judgement" you can tell your wife that the cards are still worth $50,000. Problem solved, right?
At a time when confidence in the quality of earnings by American companies is being questioned this type of financial smoke and mirrors game is a terrible idea. No one with any investing skill will ever consider investing in a company whose assets do not reflect reality but rather the estimated value deemed to be correct by the company themselves.
It strikes me as strange that none of the financial companies complained about fair value accounting when asset prices were rising, earnings were growing and bonuses were robust.