![[personal profile]](https://www.dreamwidth.org/img/silk/identity/user.png){kind=small}
Market Value Accounting
Oct. 1st, 2008 10:19 pmSo one of the things that are kind of simmering in the background of this whole financial crisis is the idea that a certain change in the regulatory environment is probably needed. Next time, we might want to prevent financial institutions that are "too big to fail" from, well, failing and then requiring $700 billion dollars feed through the system to make the pump work again.
Which is why it surprises me that people are talking about loosening accounting standards.
Right now, companies are supposed to value their assets based on something called "Market Value Accounting". From what I've been able to determine (note: I am not an accountant), this means that the value of these assets is based on what the company would be able to get for the asset if it sold it on the market right now. The roughest analogy is probably the fact that your house is only worth what you can sell it for.
This seems sensible to me - how an asset be worth more than what you can sell it for, after all? Well, part of the reason the balance sheets of all these institutions are failing is because all of the sudden no one wants to buy these instruments from companies.
The solution? Well, if no one wants to buy these asses, then we'll just change their value! Surely that will work!
This smells suspiciously like bullshit. For one - if these assets aren't valued by what people will buy them for, how will the value be determined? If the answer is that the holders will determine their value, pause for a moment and reflect just what that would mean. How in the world can a company be considered an objective observer of the value of its own assets, when it has as powerful a motivation as possible to value them as highly as possible? If the answer is that third party companies will determine their value, pause for a moment and consider the fact that all these CDOs and mortgage-backed securities had bond ratings, given to them by so-called "third party rating agencies". Some of these were very highly rated, in fact, by rating agencies that, it turns out, had incestuous relations with the companies that they were rating.
This is absurd. I would think the last thing we would want to be doing right now is loosening accounting standards, unless we really do want to face another crisis a few years down the road. If I didn't know better, I would think that this is a cynical attempt by companies to pre-set the value of these "assets" at something other than the rock-bottom prices at which the Treasury should be purchasing them.
Again, I'm not an accountant - but this seems ridiculously stupid. Are there any accountants out there that want to chime in?
Which is why it surprises me that people are talking about loosening accounting standards.
Right now, companies are supposed to value their assets based on something called "Market Value Accounting". From what I've been able to determine (note: I am not an accountant), this means that the value of these assets is based on what the company would be able to get for the asset if it sold it on the market right now. The roughest analogy is probably the fact that your house is only worth what you can sell it for.
This seems sensible to me - how an asset be worth more than what you can sell it for, after all? Well, part of the reason the balance sheets of all these institutions are failing is because all of the sudden no one wants to buy these instruments from companies.
The solution? Well, if no one wants to buy these asses, then we'll just change their value! Surely that will work!
This smells suspiciously like bullshit. For one - if these assets aren't valued by what people will buy them for, how will the value be determined? If the answer is that the holders will determine their value, pause for a moment and reflect just what that would mean. How in the world can a company be considered an objective observer of the value of its own assets, when it has as powerful a motivation as possible to value them as highly as possible? If the answer is that third party companies will determine their value, pause for a moment and consider the fact that all these CDOs and mortgage-backed securities had bond ratings, given to them by so-called "third party rating agencies". Some of these were very highly rated, in fact, by rating agencies that, it turns out, had incestuous relations with the companies that they were rating.
This is absurd. I would think the last thing we would want to be doing right now is loosening accounting standards, unless we really do want to face another crisis a few years down the road. If I didn't know better, I would think that this is a cynical attempt by companies to pre-set the value of these "assets" at something other than the rock-bottom prices at which the Treasury should be purchasing them.
Again, I'm not an accountant - but this seems ridiculously stupid. Are there any accountants out there that want to chime in?
