Posted on 03/31/2008 7:34:32 AM PDT by hripka
The Securities and Exchange Commission is out today with a letter to companies that own a lot of financial instruments whose current market value must be reported to shareholders. For more than a few companies, disclosing market values is neither easy nor convenient. The issue is the application of SFAS 157, which governs the way companies compute fair value of assets, assuming they have to do so anyway. (Banks and brokers have to do that a lot, but I won't go into the details of when they can avoid it.) The rule took effect on Jan. 1, although some companies adopted it last year. The rule sets out three categories of assets, with different ways to value them. Category 1 includes assets with easily observable market values. I.B.M. stock closed today at $114.57, and it is not easy to justify a different value if your quarter ended today. Category 2 is a little fuzzier, where there are observable markets that provide a good guide to prices of your asset, even though there is no direct market. And then there is Category 3, which is essentially mark to model. In companies that adopted Statement 157 early, we have seen a lot of assets end up in Category 3. That may be proper, since there are plenty of complex financial instruments for which there is not much of a market these days. But it also provides companies with a way to fudge figures. The S.E.C. letter asks companies for some disclosures on how they came up with those values, and on why a lot of assets may have moved into Category 3. Such disclosures can only help investors. But one part of the letter stood out to me, providing an excuse for companies to ignore a market value if they don't (excerpt)
(Excerpt) Read more at norris.blogs.nytimes.com ...
That sounds to me like an invitation to fudge.
I agree, not good. The only way to really get confidence back in the system is for the holders of mortgage paper to:
Stand up.
Disclose everything to their shareholders.
Take the writedowns like men.
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