Posted on 04/02/2009 9:40:30 AM PDT by TeleStraightShooter
As it is now, the rule made it less transparent, less current, and more complex and expensive for companies to calculate the value of options on the books.
Steve Forbes and John Chambers were on the forefront of explaining this, while Warren Buffet was on general anti-options (as means of compensation) crusade and egged on for this stupid and unnecessary, at best, accounting rule.
It was one of several stupid populist "fixes", along with onerous Sarbanes-Oxley (SOC), that came out of Enron / Worldcom / Internet bubble era, that really pushed the capital and business from our economy and markets elsewhere.
In a way, it's very similar to the bogus "bonus" diversion that the same politicians are inflicting on us today, to mask their own culpability in the problem.
Yup. You understand it.
It has been a real disaster.
Such a good expression, I'll borrow and use it. Thanks.
In "today's market", the value was zero! -- by the standards of Sarbanes-Oxley.
By "tomorrow's market" the value may be ten, twenty, thirty cents on the dollar. But Sarbanes-Oxley doesn't allow that evaluation.
Consequently, with many of their assets turned to short-term trash, and now in violation of their loan covenants, the firms had no choice but to go belly-up.
Enjoy being raped again when the ‘toxic assets’ are revalued higher than the ‘market’ value of them and the US buys them.
Warren Buffet who likes to pose as Mr Ethics personally (as the principal owner) shares in the profits made every time a sleazy door-to-door salesman unloads an over-priced piece of junk known as the Kirby Vacuum Cleaner on some low-income elderly uneducated sucker.
ABC did an expose of Kirby some time back but neglected to mention that Berkshire Hathaway owns the company.
I can’t find the ABC link but here are some others.
Believe me — I researched it as a former shareholder — BH owns this lousy company.
Spread the word!
http://answers.google.com/answers/threadview/id/221457.html
http://www.consumeraffairs.com/in_home/kirby_demo.html
bttt
I've no doubt that is exactly what will happen -- some kind of artificial compensation from the government for the wreckage of the financial industry.
After all, the government is primarily responsible for the fiasco. Not the banks. Unfortunately, the government has no money of its own with which to pay their penalty -- only taxpayer money.
At the same time, be assured that, whatever financial device is employed, this administration will be looking to end up controlling the industry they are "salvaging".
It would be one thing if we had reason to suppose that the valuations produced by available mark-to-model methodologies was meaningful for many of these financial instruments, or if there was some sort of effective mechanism - or even the near-term prospect of same - in place to ensure that an attempt was at least being made to make them as meaningful as possible.
Instead what we've got is regulatory churn for short-term political gain absent any such controls on its abuseand little public discussion of the cost in terms of inventor and central-bank confidence in already highly suspect valuations.
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Mark-to-market is not required by Sarbanes-Oxley, and there are existent mechanisms to deal with problem of "temporarily impaired" assets. FASB 157 allows non-level 1 classified of assets in a disorderly market and allows regulated capital valuations to be molded. If someone tries to tell you differently refer them to the 9/30/08 SEC/FASB statement on this question:
http://www.sec.gov/news/press/2008/2008-234.htm
Where Sarbanes-Oxley coms into this that banks - often on the advice of their auditors - elected to use market valuations because they felt if gave executives protection against accusations of having made material misstatements on valuation issues.
Well stated. Nobody is going to trust these new valuations, and relaxing by [temporarily] suspending the rule for all or only financial institutions is not a real fix for the overall problem. But it may help somewhat in preventing debt downgrades by rating services (Moody's, S&P, Fitch) and thus devastate and drive down the stocks of these institutions based on temporary unreal ($0) valuations of some of the illiquid assets on the books.
The real problem with FASB 157 (aka "mark-to-market" or "fair value") is that it simply doesn't do well and should not be blindly applied in certain circumstances, such as illiquidity in the market (which happened after Lehman and AIG collapse) and especially when combined with severe ongoing deflation of underlying assets. It simply creates the vacuum where the market for a whole class of assets or securities doesn't exist and, as such, the market value is temporarily unknown and has to be treated close to $0 on balance sheet.
It is essentially a downward "death spiral", which also has been preyed upon by short hedge funds, and it also immediately destroys the companies that sold CDS "insurance" on these banks.
So relaxing FAS 157 - while it cannot and does not fix the underlying problems, in and of itself - may provide time and allow for the market to unfreeze and find the real "fair value" of the assets to generate liquidity, at which point "mark-to-market" would become, as you said, meaningful. In other words, it's a technical fix to a specific technical problem, which, obviously, was not anticipated when rules were made by FASB... but it's not a panacea and not a solution for underlying problems.
My post dealt with Sarbanes-Oxley (SOX), and particularly section 404, independently from these banking issues. Rather, I brought it up as yet another populist legislation that claims to fix the "loopholes" or the problems, while in reality only introducing more problems and doing more harm than it was ever supposed or intended to fix.
But you are correct in noticing that it may have forced or influenced managements to provide very conservative valuations of illiquid assets on their balance sheets. That, in turn, may have exacerbated the atmosphere of panic.
Just following up a bit on this discussion, yesterday the rest of the world told the US and specifically FASB to take a hike - the IASB is just not going to accept political manipulation of valuation mechanisms as a substitute for fundamental rationalization of valuation methodology.
www.ft.com/cms/s/0/cc428a96-1fe4-11de-a1df-00144feabdc0.html
This is a huge change and probably one of many to come in the next few months; 18 months ago the American regulatory approach was in many ways the default template for the direction of evolving regulatory efforts and accounting standards, a year and half later it’s regarded as kind of a sick comedy when it is not perceived as an outright menace to international financial stability. We are never again going to have that degree of influence, but IMO it’s just insane engage in this sort of attempt to prop up balance sheets polluted with un-valuable assets and dilute our remaining influence in a world where we are dependent on a well regarded dollar and the availability of foreign investment to keep our economy functioning.
Meanwhile, I feel we are falling further and further behind the curve on dealing with valuation issues at a fundamental level- just stumbling along in the dark hoping to the light will come back on before we pitch headlong down the basement stairs - and the possibility of the US economy in a wheelchair a decade or more is a pretty scary prospect.
IMO SOX has become a whipping boy for complaints that are really about fundamental misbehavior on the part of both US and international finance, and a straw man as regards the arguments related to valuation methods. Go back to the FED guidance at the link in my previous post - there was already generous leeway to attempt realistic evaluation of asset value in disorderly markets, the failure to do so is just one more example of the widespread incompetence and wishful thinking so evident in the run up to her current problems.
Of course, that's why relaxation of the rule is not a panacea that many have described it to be - because it was not at the root of the valuation issue to begin with - which will have to be decided by the market. It only fixes a technical problem which was not anticipated when setting the rule up, but was exploited and did play a role in the stock market turmoil of financial companies when applied on strictly bureaucratic basis.
FASB, of course, has also screwed up on the options "transparency" issue, and their revised merger rules are screwing up and killing mergers that otherwise would have taken place, but now cannot be justified financially. For a little known agency they have done a lot of damage in recent years, in my opinion for no other reason than asserting their power, i.e. because they could.
We are moving from GAAP to IRFS within a couple of years anyway, so why should IASB care about an internal FASB issue which doesn't really affect the valuation of assets, only moves an illusion of such from one end of balance sheet to another to solve the issues in US stock market? Real issue affecting valuations is liquidity or illiquidity, and FASB rule change doesn't change the fundamentals.
Re SOX, it has been a bad law on a host of issues. It was rushed into by politicians in the wake of Internet bubble and accounting shenanigans, and it seriously drained foreign and domestic investment from our capital markets. People have been prosecuted for financial crimes before and without SOX, but it treats CEOs and CFOs as "criminals in waiting". But outside of that it had little, if anything, to do with this financial crisis. So, trying to blame SOX for valuation issues does make it a straw man argument.
That about says it, though lot of commentators here and elsewhere still don't understand this.
Her take is that though there some efficiency issues (primarily related to the fact that SOX, at least as interpreted by the external auditors, causes some misallocations of auditing efforts toward sometimes minor issues) it has gone a long way toward reducing abuses, and that's not a bad thing that upper management is a bit uncomfortable unless they are really on top of accounting and reporting issues - that's one of the reasons we pay em' the big bucks.
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IMO many commentators - including many financial and economic "experts" interviewed the mainstream media - really have not yet absorbed the enormous damage done to America's international position by regulatory failures. My wife gets an earful of this when international directors are in town - for a long time in this country we've had the luxury of telling the rest the world "my way or the highway" in this regard. That's over, and I don't think most people even begin to appreciate how OVER it is.
The perspective on this issue depends on where one “sits”. It has been less of the burden on large multinationals.
Compliance with SOX has been very expensive and burdensome for smaller, even multinational, companies. I know and there have been many reports of companies withdrawing from US public capital markets through mergers with foreign or private equity firms, LBOs, deregistering / voluntary delisting, moving or accelerating operations overseas, foreign companies leaving or not starting US subsidiaries, etc.
Some of it are due to normal economic issues, but in too many cases SOX was specifically cited, with details, as either a cause or significant contributing factor.
And US doesn’t have a monopoly on screwing up big time, this crisis including. AIG FP division (Joe Cassano) operated from London, so was Madoff’s money-laundering operation; Lloyds has been a bigger bust than AIG, number of big financial institutions in UK started going bust before US meltdown; Belgium’s Fortis and other large European banks have been ruined and / or taken over; Iceland is bankrupt; India’s Satyam had its own “Enron” moment; corruption in many Asian markets makes it almost impossible to invest there... etc. etc.
In the US people tend not to notice or pay attention to much of the rest of the world, but so are people overseas who keep believing or perpetuating myth of “decoupling” of their economies from the US. When times were good, they were saying that it’s their own accomplishment, not related to US economy; when things went bad, it was all because of the Americans. So they are always bitching about US - I call it “The Ugly American” syndrome, it’s not atypical.
Both sides suffer from Attention Deficit Disorder. People in US are all too often not paying enough attention to what’s going on in the rest of the world; the rest of the worlds suffers from (often perceived) lack of attention to their opinions, customs, needs , wants... So they come up with all kinds of grievances, some real and many imagined.
To separate the wheat from the chaff requires real knowledge of the particular entity. I have seen much more of that in private sector than in US public sector. For example, just recall recent gaffs by Hillary and Obama and their symbolic gifts to foreign dignitaries.
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