If I had to summarize the issue, I would describe it thus:
Investors want something more trustworthy than just management estimates of the value of complex securities — so they would like an outside market-based reference point — but the very complexity that makes these contracts hard to value as an outsider also tends to make their markets illiquid and volatile, making it difficult to get a good market value.
Top accountant Tom Selling addresses the problem of accounting for the value of credit default swaps. He makes what seems to me to be a common sense suggestion:
Requiring the asset and liability sides of derivatives to be separately measured and reported seems like an amazingly simple fix that could simplify regulation of the financial and insurance industries, reduce the need for the disclosures in financial statements written so as to
discourage one from reading them, and help investors more easily assess risk.
This certainly seems reasonable to me. When one buys a revenue producing asset with debt financing, the two are listed separately as an asset and a liability, rather than as one “net” asset, even though they may be inextricably linked (say if the asset is collateral for the loan and the loan has high pre-payment penalties).
It would make more sense to say they have no value!!!
Wasn’t there talk on CNBC about an auction for the deriviatives, and haven’t many already become due? The hedge fund managers have had to anty up a lot of money to take care of those CDS’s and deriviative bets lately,,,but there are a lot of them still out there. I had thought they were going to get a majority of them out of the market...
I don’t know a lot of the answers for this, but the summary sounds plausible....my opinion is that betting on something should be done with integrity, and the money up front, and that would keep a lot of it from happening.
I read “Financial Armegeddon”, as it was a Christmas present, and it was very close to my own belief that the market would recover somewhat, but in six to ten years we will be right back where we were in Septemeber 08 if changes aren’t made. We need to prepare for some future problems in U. S., and the Horizon Project scientists are saying the same thing, although their “end of world” scenario in 2012 may not be completely accurate, as God is in control. I’ve heard others predict 8-10 yrs as the D-Day for complete meltdown if this market and economy is not fixed correctly. Time...eternity is swallowing up time.