March 17, 2009


Tick... Tick... Tick...


Anonymous said...

Today is the first day to comment on FASB 157, before the committee can revise it on April 2, 2009

The following is an good example of what the committee is proposing that the rule go back to after April 2, 2009.

I own a Taxi Company, Mike's Taxi Service. I have 10 Taxis. I bought the Taxis's over the last couple of years. Each Taxi cost me $10,000 (they are very cheap taxis).

Using basic math skills, you can see my 10 taxi fleet cost me a total of $100,000 - right? (10 x 10,000 = 100,000)

Unfortunately, I hired the wrong cab drivers. It seems they never checked the oil and now half of the fleet is broken down with blown motors.

If I needed to sell my broken Taxi Cabs I might get $500 each in the state they are in. Since they have blown motors, my Mechanic Louie has resorted to calling them "Non Performing Assets".

Along comes Nick. He wants to buy my company and asks to look at my financials to better gauge the true value of my company.

My books show that I bought 10 Cabs for $10,000, I have depreciated them a little bit over the last couple of years ($1,000 total) so according to my accountant, the Mike's Taxi Fleet is worth a cool $99,000! (100,000 - 1,000 = 99,000)

Hey, I know it's not their true and realistic value, but it looks cool on the Quickbooks Balance Sheet and as a side benefit it also looks like I'm doing really well!

After Nick reviewed my books, he bought my company for full book value - $99,000. Only problem was that a week later he found out about Louie's "Non Performing Assets" in the back of the garage.

Boy was Nick mad. The real value of the 5 blown up cabs was more like $2,500 - not the $49,500 I was showing. Oooops. Sorry Nick.

In real life my metaphoric Taxi Cabs symbolize large securitized pools of mortgages.

And as you might guess, like my Taxi's, some of those mortgages are not performing so well. Their value might not be all they are cracked up to be.

How that value is determined was somewhat up to various levels of interpretation.

What the banks, pension funds, hedge funds used to do is dump all these broken bits into a big bucket called Level 3.

They hid the bucket in the back of the garage. They put a value on that bucket, much like I did with my broken down Cabs.

Anonymous said...

Those Option Arms and ALT-A mortgages will reset soon, do you think the banks want FASB-157 to change before November, 2009.

In our opinion, requiring financial institutions such as (but not limited to) Citigroup Inc. (C), JPMorgan Chase & Co. (JPM), Bank of America Corp. (BAC) and U.S. Bancorp (USB) to refinance their portions of the substantial number of Alt-A and Option ARM mortgages that are expected to come due over the next 3-to-5 years would be better than tinkering with FASB rule 157 or mark-to-market accounting.

Today, the U.S. House Financial Services Subcommittee is holding a hearing on whether or not to modify or make temporary adjustments to mark-to-market accounting (an approach which values financial assets at current market values, even if markets are engulfed in hysteria and diverge from an asset's obvious intrinsic worth).

If such a modification were to become a reality, we would anticipate instantaneously a change in financial institutions' balance sheets for the better, from at least an accounting standpoint.

However, suspending the mark-to-market accounting would ultimately create a gross aberration of value.

The valuations of billions of dollars of assets would result in a financial institution accountants' modeling or pulling out of thin air what the assets would be worth, by not relying on current market prices. (By the way, these would be the same accountants with the same models that predicted home prices would never fall, subprime was an infallible investment, and 30-to-1 leverage was a good thing).

Anonymous said...

Who will fund the banks if FASB-157 is revised.

You're underwater on your mortgage. You're paying more than your home is worth right now. And if you want to sell it, get in line, everyone wants to sell. No one is buying."

You've just found out something that has a lot of value to you isn't worth that much, if anything, to anyone else. You're in exactly the same position as the banks holding mortgage securities.

Here's the difference between you and financial institutions. They want to rewrite the rules and say their house of mortgages is worth something, generally whatever they say it's worth.

The banks are in the midst of a financial crisis and their assets -- all those mortgage securities and other junk -- are doing them no good.

Mark-to-market is forcing them to write that stuff to zero and get some real assets, preferably cash, into their coffers.

Banks don't want to accept the truth homeowners have faced about their assets.

The banks want to say their assets are worth something even though no one will buy them -- at any price.

Critics of the banks' plan say confidence and liquidity, the ability to cash something out, are a critical part of mark-to-market rules.

The Financial Accounting Standards Board has resisted relaxing the requirements for two years precisely for those reasons.

Yet these same banks want to break out the eraser and say that zero isn't really zero, it's 50 cents on the dollar. Is it real?

As taxpayers who have funded their bailout, why should we risk our cash to find out?

Anonymous said...

I found out something today. The Bank are not helping anyone, they lie! The banks have a plan and that is to loot the United States until we are Bankrupt. The writing is in the wall, for the first time I can really see what they are up to.

Mitesh Damania said...

Fight that NWO, that Empire, that hegemony.

JaneZ said...

Anonymous said...

I found out something today. The Bank are not helping anyone, they lie! The banks have a plan and that is to loot the United States until we are Bankrupt.

They don't lie, The truth changes.

Anonymous said...

Why don't all you NWO people just go away.....there is no NWO, only thieves, all you people do is concoct your ideas and take what you want from everything happening to fit into your silly game.

Note to self, remember: Selective reality.

Anonymous said...

The FASB proposal recommends that companies take two steps to determine whether there an active market exists and whether a recent sale is distressed before applying their own models and judgment:

Step 1: Determine whether there are factors present that indicate that the market for the asset is not active at the measurement date. Factors include:

• Few recent transactions (based on volume and level of activity in the market). Thus, there is not sufficient frequency and volume to provide pricing information on an ongoing basis.

• Price quotations are not based on current information.

• Price quotations vary substantially either over time or among market makers (for example, some brokered markets).

• Indices that previously were highly correlated with the fair values of the asset are demonstrably uncorrelated with recent fair values.

• Abnormal (or significant increases in) liquidity risk premiums or implied yields for quoted prices when compared to reasonable estimates of credit and other nonperformance risk for the asset class.

• Significant widening of the bid-ask spread.

• Little information is released publicly (for example, a principal-to-principal market).
If after evaluating all the factors the sum of the evidence indicates that the market is not active, the reporting entity shall apply step 2.

Step 2: Evaluate the quoted price (that is, a recent transaction or broker price quotation) to determine whether the quoted price is not associated with a distressed transaction.

The reporting entity shall presume that the quoted price is associated with a distressed transaction unless the reporting entity has evidence that indicates that both of the following factors are present for a given quoted price:

• There was a period prior to the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets or liabilities (for example, there was not a regulatory requirement to sell).

• There were multiple bidders for the asset.
The proposed guidance also provides examples of measurement approaches in the event that the observable input is from a distressed sale.