SFAS 157: Market Prices Too Low? Just Ignore Them!

Here’s a honey of an idea that almost slipped by unnoticed last week. Thankfully, the NYT’s sharp eyed business columnist, Floyd Norris, caught it.

An SEC opinion letter advising companies how to deal with their Level 3 assets made a rather curious suggestion. They advised that if the prices of mark-to-model crappy paper are underwater, well then, declare it the result of forced  liquidation — and then you can simply ignore them.

It truly boggles the mind.

Would someone please explain to me how providing an official mechanism for allowing companies to ignore market values of the bad investments they made help investors? Instead of working towards transparency, the SEC is providing a mechanism to allow banks to hide losses from their shareholders. This is nothing short of an invitation to commit fraud.   

Here’s the offending passage:

“Under SFAS 157, it is appropriate for you to consider actual market prices, or observable inputs, even when the market is less liquid than historical market volumes, unless those prices are the result of a forced liquidation or distress sale. Only when actual market prices, or relevant observable inputs, are not available is it appropriate for you to use unobservable inputs which reflect your assumptions of what market participants would use in pricing the asset or liability.” (emphasis added)

Norris suggests this is an invitation for banks having two sets of books. One for Bank disclosures for shareholders: Ignore these paper losses, the prices are only due to a forced liquidation — and another for Margin calls: Hey! You are underwater by XX% in this; send in more money! Apparently, the SEC believes prices are irrelevant, except when it comes to margin calls.

Stop and think about this for a moment: Every margin call is essentially a forced sale. Consider the alphabet soup of highly leveraged derivatives out there, where many of the most recent trades  have occurred because some hedgie has blown up. What might the unintended consequences of this rule actually be?

Today is the last day of the quarter. There is often window dressing to the upside the last few days before a Q’s end to make the fund’s performance look better. Imagine if there was an incentive to make a huge category of derivatives’ last trade appear to be the result of a margin call? We would have this enormous window dressing down — so as to not have to come up with a legitimate value for tier 3 junk.

This is a directive to banks to make the situation much, much worse. They
can clean up their own books by forcing liquidations elsewhere. Un-fricking-believable.

Holy shnikes, have any of these people at the SEC every worked on a trading desk?


If Market Prices Are Too Low, Ignore Them
Floyd Norris
NYT, High and Low Finance
March 28, 2008,  6:21 pm



What's been said:

Discussions found on the web:
  1. VennData commented on Mar 31

    Help investors? Help investors?? Hahaha…

    Maybe at the next press conference someone should ask the Occupant-in-Chief, “Mr. President, where are the voter’s yachts?”

  2. Bill in IL commented on Mar 31

    I have a question:
    If a bank is keeping two sets of “books”, one regulated by the SEC, and the other isn’t, then why can’t the unregulated funds be quarantined by law? What would be the effect? Why should they be allowed to disrupt the regulated arm of the businesses?

    I am not a financial major, so please stay polite.

  3. zell commented on Mar 31

    Guv’mint has plenty of experience in trading desks.

  4. Marcus Aurelius commented on Mar 31

    We are witnessing the culturalization of fraud.

  5. Philippe commented on Mar 31

    It is assumed that the SEC as well as the funding counterparts know and read a balance sheet as being in two parts assets and liabilities. Accounting level 3 for its residual value will prolong the funding agony of these financial institutions with an average leverage of 32/40 and a shrinking capital.One should be reading this advise as an invitation to make a true recognition of their financial illness.

  6. Byno commented on Mar 31

    I can see it no in economics textbooks written 50 years in the future:

    “The US financial sector, having learned nothing from the collapse of the Japanese equity market during the 1990’s, proceeded to make exactly the same mistakes as the Japanese, albeit by an order of magnitude.”

    Honestly, it’s unreal how banks, regulators, investment companies, etc. have taken one of the biggest financial clusterfucks in the history of earth and decided the only appropriate way to pay homage is by creating an even bigger clusterfuck.

  7. blam commented on Mar 31

    This is the real telling issue of the whole mess isn’t it ?

    The development of truthful financial statements is central to financial regulation. It is not about the companies it is about investor protection. The CDO mess is likely to have not been possible without off-balance sheet liabilities and mark-to-model accounting.

    The very reason the American markets became the No.1 and attracted capital from around the world was the security of principle, strong regulatory environment, and investor protection. Like everything else in the last eight years, fraud has been accepted as the prefferred method of attaining the desired outcome. Except that, ultimately, the desired outcome gets clobbered by the unintended consequence.

    My parents taught me right from wrong. I honestly cannot say that about the moneyed class that has been working overtime to dissassemble this great country. The greatest threat to America seems to be from within.

  8. Stuart commented on Mar 31

    The SEC, hell all central authorities, are desperate for banks to stop writing down assets. They will pull all stops, including looking the other way, passively condoning reporting fraud to get what they want. Foreign investors have to be complicit or beyond foolish to be investing in anything marketed by wall street, or under SEC regulation anywhere. This is outrageous. Alot of folks will get out of dodge on this news.

  9. Stuart commented on Mar 31

    One other thing, all should notice the SEC was fine when assets were shooting to the moon. I certainly didn’t see such a similar statement when asset prices were afflicted with another bout of “irrational exuberance” and reflecting bubble-like pricing. This double standard could not be more obvious and more damaging to the credibility of US capital markets and its regulators.

  10. Andy commented on Mar 31

    I think you may be misreading this. The way I read it, you must use observable inputs for your asset pricing if available, but if that input involved a forced liquidation of a similar asset, you’re free to ignore that particular piece of data.

    In other words, just because BSC was sold for $10/share doesn’t mean that’s what it was really worth had it not been forced into it. Given that forced liquidation is a circumstance for the entity owning the asset and not necessarily for the asset itself, it’s possible that the asset price is not a true market price and you’re free to ignore that data point.

  11. john commented on Mar 31

    I read this with disbelief but gradually it just reconfirmed for me what is going on here and that is that the administration and all the other regulatory bodies are going to do whatever it takes to avoid a market collapse. In my judgement, others may disagree, this is essentially a political decision like the Potemkin regulatory changes that Paulson is going to announce to fanfare today. Whatever happens they are desperate to prevent a total collapse during a Republican administration. Remember what happened last time. If this means throwing overboard conservative principles to rescue investment banks and homeowners so be it. If it means creating loopholes for financial institutions to lie to their shareholders so be it. We shouldn’t really be surprised this is a administration that has cheerfully made lying and corruption systemic, who have launched expensive failed wars and seriously damaged our diplomatic and strategic global clout. Why should a little book cooking surprise anyone. Sorry for the political dimension but it really does seem all of a piece with their incompetence, short sightedness, mendacity and total disrespect for good govt.

  12. Mark D commented on Mar 31

    @andy um no if US widget co. goes bankrupt its stock of widgets goes to the creditors for the famous pennies on the dollar, and you’re right that does not make the widgets intrinsic value less (a big supply of widgets on the market will depress the value in the short run). What this is is 2 sets of books to try and stave off that bankrupcy.

  13. tbapple commented on Mar 31

    RE: Stuart

    By any definition of free markets, the market price is the correct price.

    Bear had a book value of $80 on March 1 and $10 on March 31. Even Cramer knows that the last price is the correct price.

    Using your logic, if I paid $1,000,000 for my house last year but every appraiser says its now worth $500,000 because all my neighbors have been foreclosed on and I live in a ghost town; my bank must still give me a loan based on the $1,000,000 price.

    Oh right, since I’m not too big to fail I don’t get this bail-out.

  14. Renting in Mass commented on Mar 31

    I agree with john. It doesn’t make sense to ignore the political dimensions of this mess.

  15. Jim D commented on Mar 31

    Can we all stop pretending that it’s a liquidity crisis now?

    If this was a liquidity crisis, you would want to mark down everything in sight, and open your books to inspire confidence.

    If, on the other hand, it was a SOLVENCY crisis – well, you’d do this. Hide the losses, hope they go away. Because if everyone didn’t… the system might collapse.

    So, if we could now just stop pretending that it’s liquidity, maybe we can fix this thing.

  16. Marcus Aurelius commented on Mar 31

    Posted by: john | Mar 31, 2008 8:38:16 AM


    Mendacious fiscal buggery ensues.

  17. JP commented on Mar 31

    I agree, it’s a solvency crisis.

    The only solution for investors is to get the hell out until someone takes the bull by the horns and cleans up this mess.

    I’m reasonably confident that won’t occur in the current administration. And god help us if it doesn’t happen in the next administration.

  18. Stuart commented on Mar 31


    “Using your logic, if I paid $1,000,000 for my house last year but every appraiser says its now worth $500,000 because all my neighbors have been foreclosed on and I live in a ghost town; my bank must still give me a loan based on the $1,000,000 price.”

    No, exactly the opposite. My logic conclude your house is now only worth $500,000. I wasn’t critizing the SEC for not issuing a similar statement to the upside in asset values. I was pointing out the fact that because they didn’t, it is overt evidence the SEC is much more interested in preserving asset values than they are protecting investors.

  19. Fred commented on Mar 31

    Stuart – Pushing your analysis of the million dollar appraisal: the right comparison may be, if a bank lent based on a $1 million collateral value, and then the estimated value was $500,000, BUT, the loan was current, what do you do? The answer is nothing because your underwriting took (supposedly) into consideration fluctuations in value. Someone pointed out the solvency vs liquidity differentation – right on. I recall living in mexico city in 12/1994 when they let the peso float freely. Financing evaporated overnight, literally. Then money in general became more scarce. If you had USD (which I didn’t), you bought things in then devalued pesos for half – and I mean big ticket items like Cartier watches and new cars. The US Govt stepped in then as well. Essentially US Treasury (I assume backed by the Fed) propped up the Mexican Govt, directly. The Mexican banking was definitely toast but the government was next in line to collapse. I for one am grateful that the US Govt was in a position to backstop the Mexicans. Why is it that we find it so easy to criticize ourselves when the truth is, it’s grey. There are no hard and true answers to any of this but one thing is sure – criticize the Fed all you want but I’ll take the full faith and credit of the US Government over basically any other alternative.

  20. larster commented on Mar 31

    Add Chris Cox to the list of Bush appointees that were formerly thought of as intelligent. I agree that you cannot avoid the political aspect of this crisis and Paulson’s comment in his soon to be delivered speech that you cannot blame the regulatory system for the crisis is scary. If markets work and the regulatory system works, then what happened? Is it the bogeyman’s fault? Is it Al Queda? If nobody takes responsibility, we will be sorting this out for years.

  21. Stuart commented on Mar 31

    “I’ll take the full faith and credit of the US Government over basically any other alternative.”

    Good luck with that. Ultimately value is what someone else will pay. Regulators are there to protect investors not prop up interests intent on privatizing gains and socializing losses.

  22. VoiceFromTheWilderness commented on Mar 31

    I have to chime in and support john’s point that there is nothing surprising about this, and that it is clearly political. The problem most people have in responding to what the administration does is assuming that they are playing by the old rules — they aren’t. They do not do things because ‘it makes sense’, for a given role or function to be more or less effective, or because that is what the mandate of a given entity is. They do things to manipulate the public and promote the interests of their friends.

    Example: They have announced that ‘because we have a big financial mess, the right thing to do is to completely gut the regulatory systems (and build a new bureacracy), and institutionalize the illegal ‘bailout’ of Bear Stearns. Right, because one things for sure — there’s no way that *anybody* could have forseen that a right wing takeover of the federal government would result in an out of control business environment, so … (say it with me now) It’s all Bill Clinton’s fault. Well, and Roosevelt, who was obviously a commie, and stupid besides.’

    How did we manage all those decades without the guidance of the right wing? No one can explain it.

    I have to tangentially disagree with John however about ‘principles’ — Republicans have no principles, though they really like all the intellectual fools who buy into the ‘principles’ they claim to espouse, oh and the religious fools who buy into them too. The reality is that any so called ‘right wing principle’ can be demonstrated to be a con easily and quickly, and that most particularly includes all the economic ones. Anybody who gets their ‘principles’ from Newt Gingrich is in for a rude awakening, though they may manage to take the rest of us down with them.

  23. Camille commented on Mar 31

    Photo of banking members back in 2003 cutting regulatory paperwork (symbolically) with a chainsaw:


    Krugman makes mention of it in today’s article in the NYTimes…had to see it for myself.

  24. Marcus Aurelius commented on Mar 31

    I’ll take the full faith and credit of the US Government over basically any other alternative.

    Posted by: Fred | Mar 31, 2008 9:33:46 AM


    Maybe Mexico will return the favor and prop us up. I suggest you hoard dollars.

  25. michael schumacher commented on Mar 31

    If what is being proposed (by the corrupt POS Paulson) is allowed to exist in it’s “draft form” that is tantamount to stealing and glossing over the largest fraud and deception in the market’s history. I hope that the “congress” truly looks at what is being attempted here….and it’s not for our benefit.

    Where do I get my pitchfork and torch??
    I feel the strong need for one about now.


  26. Bob Brandt commented on Mar 31

    “Clusterfuck” is truly the word that comes to mind.

    If any single individual handled their money this way, they would already be in jail.

    I’d like to see Hank’s GS positions.

  27. Eric Davis commented on Mar 31

    you can always tell how self-important a politician feels he is, by the number of flags behind them.

    Paulson is Super, super, super, super, super, super important.

  28. Stuart commented on Mar 31

    March 28 (Bloomberg) — Federal Reserve officials may be rethinking their aversion to acting against asset-price bubbles, an article of faith during former Chairman Alan Greenspan’s 18 years at the helm. After this month’s near-collapse of Bear Stearns Cos., Minneapolis Fed Bank President Gary Stern — the longest-serving policy maker — said in a speech yesterday that it’s possible “to build support’’ for practices “designed to prevent excesses.’’ New York Fed President Timothy Geithner, whose district bank took on almost $30 billion of Bear Stearns assets to rescue the firm, argued two years ago for a larger role for asset prices in decision-making, and there’s no indication his views have changed.

    For Fed policy makers, “the consequences of their permissiveness have become so disastrous that they simply can’t keep singing the same old tune in public,’’ said Tom Schlesinger, executive director at the Financial Markets Center in Howardsville, Virginia.

  29. Groty commented on Mar 31

    Suspending mark to market reminds me of one of the blow ups/frauds earlier this decade (I’m pretty sure it was Lipper, but can’t be 100% sure).

    A PM was quoted in a Bloomberg article defending his marks by saying he was marking the securities where he anticipated they’d trade in the future after the extreme market turmoil of 2002 passed. In other words, he ignored current market values and created whatever numbers he wanted.

    Everyone in our shop was astounded that he was was willing to go on the record with such an absurd statement and essentially guarantee his conviction for commiting fraud.

    Apparently, he was about 6 years ahead of the cutting edge accounting pronouncements coming out of FASB.

  30. Alfred commented on Mar 31

    If I understand you correctly you are suggesting that banks operate on two standards, one for the values of assets on their own books and another for assets they lend out to borrowers like HFs. The SEC opened an investigation into this problem as early as last August. How can banks reprice certain assets they hold as collateral for money they lend to investors in order to not reprice similar assets they are holding on their own books (moving them to level 3), and not anticipate to run into severe problems with regulators?

  31. JustinTheSkeptic commented on Mar 31

    Stuart, “the consequences of their permissiveness have become so disastrous that they simply can’t keep singing the same old tune in public,’’

    Oh yet they can…I believe it is coming in my right ear as I type – through the likes of Hank Paulson via CNBC…

  32. Ross commented on Mar 31

    Hearing the words of Paulson, I get the uncomfortable feeling that the proposed regulatory reforms are nothing more than a power grab. It’s not regulation, it’s centralization.

    This is ending badly..

  33. Eric Davis commented on Mar 31

    I keep wondering when the shell game between, “disorderly liquidation” vs. This Shit has no value. will end.

    Isn’t the essence of the “free-market” capitalism, having prices marked to market.

    Wouldn’t the fact that there is no market for something be an indicator that the value is ‘0’.

    I guess it’s more of the 2 tiered system, the system for ‘the Special people’… then the system for the rest of us.

    Well… Maybe we can get back to printing money so we can pretend earnings are growing.

  34. Stormrunner commented on Mar 31

    Sorry for the repost but this fits with the power grab vs true spirit of regulation statement suggested by the previous poster. When considered individually the moves occurring are questionable enough when considered in aggregate the implications boggle the mind

    Bush proposes financial regulation overhaul

    “The proposal would designate the Fed as the primary regulator of market stability, greatly expanding the central bank’s ability to examine not just commercial banks but all segments of the financial services industry……………
    The plan would shut down the Office of Thrift Supervision, which supervises thrift institutions, and transfer its functions to the Office of the Comptroller of the Currency, which regulates banks. The plan would eliminate the distinction between banks and thrift institutions.

    The role the Federal Reserve has been playing in efforts to stabilize the financial system after a credit crisis hit last August would be formalized.

    The Fed would become the government’s “market stability regulator,” given sweeping powers to gather information on a wide range of institutions so that Fed Chairman Ben Bernanke and his colleagues could better detect where threats to the system might be hiding.”

    Isn’t this the same OCC that under Admin direction blocked all efforts by States Attorneys General to put a lid on “Predatory Lending”, ending finally in the use of the Patriot Act and its “suspicious activity reports” or sanctioned corporate-fascist spying on civilians / commonly confused with terrorists to silence Spitzer who deserves his plight, it’s the timing that’s questionable?

    “FinCEN Introduces the PATRIOT Act Communication System
    Pursuant to Section 362 of the USA PATRIOT Act, FinCEN was tasked with developing a highly secure network to allow financial institutions to electronically file certain BSA forms. FinCEN met this goal by making the PATRIOT Act Communication System (PACS) available to the financial community on October 1, 2002. Initially, only the forms filed by depository institutions, the Currency Transaction Report (Form 4789 or CTR) and the Suspicious Activity Report (Form TD F 90-22.47 or SAR) will be accepted through the electronic filing process.”

    Let’s put the hackers in charge of the network, now that all the data has disappeared!!!! That way only they will know where it went, imagine every one of your transactions tracked while literally billions disappear in IRAQ

  35. Stuart commented on Mar 31

    and the dollar spikes…. too funny.

  36. sergtat commented on Mar 31

    bandera roja is coming, millions of useless bureaucrats will oversee the financial industry. You will have to go through the endless red tape to get a credit card approval, forget about a anything else. And as usual it will hit the six pack Joe the hardest. Will cost arm and leg to buy a car or a house. You will have to prove your income to buy a TV set. It is not Orwell it is USSR 1984. Been there done that. S. America is looking better and better…
    bandera roja
    bandera roja

  37. Douglas Watts commented on Mar 31

    Grand Lake Stream, Maine is under oh … about 3 feet of snow right now …

    The salmon and smallmouth fishing will be good in June, though.

  38. Estragon commented on Mar 31

    I like to rage against the machine as much as the next guy, but I have to point out that there are some perfectly valid reasons to ignore observable inputs based on distressed sales.

    As I’ve posted before, the core problem is using a rule where a principle is needed.

    The appropriate pricing of an asset (or liability) depends not only on the nature of the asset, but also on its intended use and ultimate disposition. Applying principles (eg. matching revenues to costs in the period they occur, valuation on a going concern basis, etc.) properly forces accountants to consider the intent of a particular presentation, not just the rules.

    If the utility (expense savings or profit potential) of an asset is unimpaired, and the owner of the asset doesn’t expect to dispose of the asset before the end of its useful life, the asset should remain on the balance sheet at book, with appropriate depreciation taken as the utility flows through the income statement. Users of these financial statement want to assess the ability of the company to profit from operations, comparable between time periods and others in the industry. Marking assets to market in this case, especially to an unusual market, would distort earnings in ways unrelated to the underlying business.

    Where market to market should be used, irrespective of whether the market is distressed or not, is in cases where the asset is relied upon as a cash equivalent source of liquidity. The long term utility of the asset is irrelevant, only its utility as a cash equivalent is relevant.

    It’s true this results in the same asset being priced in two different ways, but this simply reflects the fact that the value of the asset is related to the way it’s used.

  39. michael schumacher commented on Mar 31


    That is , in essence, a great argument but still does nothing to address the fact that these thing(s) are still worthless and coming up with a new way to explain that they are worthless does nothing to change those values.

    The underlying value is still determined by (what is left of) free market pricing.

    and since we are in the process of re-writing those rules because we don’t like the part about marking to reality I see where that argument starts to get some “play”

    That’s all it is….just “play”


  40. cinefoz commented on Mar 31


    Well said.

    Here’s a part of the SFAS quote above that was mysteriously left out. Including it would have made it, taken as an entirety, look less shrill or extreme.

    “Fair value assumes the exchange of assets or liabilities in orderly transactions.”

    This is an excellent example about what is so annoying about gloomsters. They take something current, spin it ever so slightly to make it look like an extreme example of some agenda being pushed at the moment.

    I’m starting to write these people off as phonies who just want to see if they can get a reaction by spinning something.

  41. Fred commented on Mar 31

    Micheal –

    Wrong. You don’t get it. There is a difference between a failure to price an asset today and what the value is over time. Take a cue from the billions of distressed pools waiting patiently on the sidelines to buy this stuff. Folks would learn a lot if they just watched the distressed guys. This is not a market for day to day analysis. You need to appreciate and take the time to understand why values are impaired. Clearly there is junk out there and will grow, but there is much more value that is impaired simply because it sits within a structure that affecting said value. Perhaps the great lesson here is that we’ve had a very long and bullish run with securitization and that aggregation has a downside as well.

  42. Estragon commented on Mar 31

    MS – “…these thing(s) are still worthless and coming up with a new way to explain that they are worthless does nothing to change those values”

    The point is that “these things”(?) may be worthless as a source of cash to one owner, but have significant value as an income stream to an owner planning to and able to run it off to maturity.

    In the latter case, nobody knows with certainty the extent or timing of defaults in the income stream, so assumptions are made. As long as the assumptions are reasonable, and are disclosed in the statements, this presentation is better than a writeoff today which is reversed next year. The writeoff/recovery method sounds like a pretty good “cookie jar” to me, and I don’t doubt it would be used as such.

    In the former case, I agree with you. The asset has to be sold (into a distressed market), marked to the distressed price, or reclassified as a long term asset not available for sale.

  43. Estragon commented on Mar 31


    I agree. On a macro (as opposed to accounting) level, my issue with the way FAS157 is evolving is it isn’t making the distinction clear as between those using distressed assets for liquidity, and those holding to run off. If the presentation were made clear, weak short term holders would be forced to bring out their dead for strong hands to capture value.

  44. michael schumacher commented on Mar 31

    Crap is still crap no matter what label is applied to it.

    make all the “time” arguments you want…..the underlying factor is what is this worth TODAY.

    Leave it to Wall Street to continue to beat the drum of “undiscovered value” over and over again and that you’ve both been suckered into that mantra is not surprising at all.

    I bet you said the same thing about tech stocks in 2001 when CAPEX was used as a tonic to the market. Here we are 7 years later and you people are still using the tired old CAPEX argument.

    When will you ever learn.

    Said it before…..CRAP is STILL CRAP no matter what label you affix to it.


  45. michael schumacher commented on Mar 31

    It’s just a tad ironic that a market with many levels of “observable inputs” is desperate to come up with ANY model that allows them to make up what they think the value “should” be at. I’m sure I would be looking at that if I held billions of dollars of declining financial products with the only “out” being that someone, ANYONE, find value in them over time.

    that some people here continue to cling to the “value investor” mantra is just more evidence of a lack of ANY reality.

    But continue to shovel 10 lbs of shit in a 5lb bag……works for Paulson et al…


  46. Eric Davis commented on Mar 31

    … To try and respectfully agree with MS.

    The dirty secret is that these things will always be untradable, and only worth the income returning from them.. which is possibly a loss of principle and 2-3%(I’m just throwing out a number).
    But 5-10 cents on the dollar is probably the value.

    But once the inflation crisis hits main-street, that genie won’t stay in the bottle. They can’t pay $10 for Value meals,and $20 for 5 gallons of gas for long, Main Street will force Wall-street and the government to come to terms with inflation.

    Rates will rise significantly, Not only will the CDO’s be worth only the return but so will all the 2-5 year bonds rolling out the doors in the past 6 months. As Rates run to 7-9%.

    this is just my opinion. The idea that an “untreatable” object, has value, is Spin by the banks, to keep the lid on this…Which is probably working. But they have no value… Every business class or book I’ve ever taken or read said this specifically “things are only worth what you can sell them for.”

    till congress steps in and buys this crap, which they will(and shouldn’t). They are such convoluted instruments, the Return for the Government will me minor. Especially since the banks will just start unloading houses to stop waisting their time “Servicing” them.

    This has Wall-street bending the Fed’s over a fencepost, all over it.

    but none of this will save us. It’s just rearranging the deckchairs.

    But remember Stocks go Up with inflation…. They just go down with increased input costs….. Up…. and Down

  47. BDG123 commented on Mar 31

    I see Fred is still trying to convert the bears on Barry’s blog. It’s a noble cause in the name of Jesus, goodness and righteousness. It was just months ago when he crowed about Goldilocks. Sure those who knew better were completely ignorant. Only to find out he had eaten that ten pounds of horse shit stuffed into a five pound bag that Wall Street was feeding him. Now, he’s out to defend the toxic trash Wall Street is dealing. And, lo and behold, the only people willing to buy it are American citizens through our Federal government’s bailout program. Oh, and Fred. I’m glad that I can still report brainwashing still works. Fred, my man, when are you going to wake up. You’ve been bamboozled.

  48. wunsacon commented on Mar 31

    Oh, what a tangled web we weave, when first we practice to deceive.

  49. DonKei commented on Mar 31

    When I was a young man, I could be sold on just about every wild-eyed optimistic idea some moron ran by me. I’d have probably bought CDO’s then, believing them to be truly innovative means of leveraging assets to achieve maximum returns.

    Now I am older, and I find that I can’t be cynical and skeptical enough. Is that “bearish”? If by “bear” you mean someone that carries a healthy dose of skepticism about the schemes and dreams of others wanting to use my money.

    I’m skeptical even more so of folks trying to convince me I shouldn’t be. It’s not called a “con” game for nothing.

  50. michael schumacher commented on Mar 31

    dirty little secret is correct.

    Value is completely relative. If you see value in those… ahem……”products” then by all means, as Pete Townshend said ” assemble the musicians” put together a pool of investors and go take out that “value” that the machine is so desperately trying to get rid of so it can get back to the business of creating more “products”……

    Add value investing to the already overused words of ’08….along with oversold and volatility…..there are several others but I digress…

    Value is relative……these have little or no value no matter what the time frame is.


  51. Fred commented on Mar 31

    BDG123 – Thanks (I guess) but I don’t ever recall pumping Goldilocks.

    MS – Bags of shit as you say are in fact bags of shit. Point is you are taking an entire CDO and classifying it based on mark to market which Estragon points out correctly is driven by FAS157. Question for you is would you buy a pool of performing Alt A Manhattan Jumbos at, say, 70 cents on the dollar? how about 60 cents? The only way to answer the question is to look at the real estate, your cost to get at it if that’s the exit, then discounted back for time to exit. Ultimately the value is in the collateral, not a financial accounting standards rule. It’s fine if you wouldn’t *buy* this stuff because a lot of guys will but to simply throw around your silly names speaks volumes about your inability to understand the issue. Smart money is buying fat yields on performing debt backed by good real estate. The guys who know how to clean up after the party are in control.

  52. michael schumacher commented on Mar 31


    Of course there will be a time for bottom feeding…..that you are suggesting it’s here now (such a deal @ .70 on the dollar!!) and if you don’t act you’ll miss the boat makes you sound like a cheerleader for the NAR.
    Of course we all know that Manhattan RE is such a great indicator of where the entire pricing structure is headed……..you must be trying to offload that bridge you bought last year….

    Try again with a more relevant example as not everyone lives in lower manhattan.

    and this just takes the cake:

    “The guys who know how to clean up after the party are in control.”

    Really??? and the party is over already????

    sorry this has more to go than a token haircut on high end properties in an environment where NO ONE marks anything to real value.

    sounds like you have quite the “inability to understand the issue(s)”

    “Smart money is buying fat yields on performing debt backed by good real estate. ”

    Show me……..


  53. Fred commented on Mar 31

    MS –

    You’re just a little too angry about what I don’t know. 70 cents is an example. Point is if the loan performed at par and you could buy at 70 cents, doesn’t it follow that there is a market for that? You consistently avoid the central question which is whether or not good loans are impaired by the structure and that at some point the smart money buys the entire structure to get at the good assets. The distressed pools are there, waiting. As for the Party, yeah, it’s over. Clean up time is next. Make some calls.

    Your personal attacks are frankly silly. You seem like a smart guy and well read, if not ahead of the curve. Don’t let it get the best of you in an otherwise interesting time to be alive.

  54. michael schumacher commented on Mar 31

    Leave it to Fred to cherry pick on his own example…..

    “You’re just a little too angry about what I don’t know”

    And that, my friend, is too much to post here..

    Good Luck with your Ego……you’ll need it.


  55. michael schumacher commented on Mar 31


    I am in some agreement with what you have brought up however the timing of it all is where the problem arises. That is a discussion that we have plenty of time to have. That others here have made it to mean “right now or else” is just so mis-directed.

    If these assets were really being unfairly marked down due to what you describe then it would not take the collective machine to continue to make us “aware” of that. It would be wholly obvious…….

    What Fred describes is a wholesale suspension of anything fundamental regarding asset prices so that you will “not miss the boat”…..Gee didn’t we hear that already about 12 times in the last year??? This is THE bottom….lather, rinse, repeat.

    Ah…. I’ll pass on all those…..ah “deals”


  56. wiseguy commented on Mar 31

    just think, the Fed takes in all those distressed financial products and then promptly declares all information to be “private” — ironic, very ironic. Of course, if you worship the Fed, then where’s the worry?

  57. Fred commented on Mar 31

    MS – I did not say one would miss the boat, nor did I imply that there is some immediate opportunity to be missed failing quick action. What – if anything – do you know about distressed debt? Of course there’s no rush, never said there was a rush. But you seem to think that things can only get worse – and when that attitude is widely adopted frankly is when things start to stabilize. I am not waiting for some v-shaped move b/c it’s not going to happen. In six months the macro issues over in China and India (perhaps Argentina as well) are going to dwarf what’s happening here.

    Hey – Can you pass the Capt. Negativity punch? I am feeling a little too good about being ahmurikan.

  58. michael schumacher commented on Mar 31

    “What – if anything – do you know about distressed debt?”

    Frankly speaking ALOT more than you will ever know.

    apparently you think you know alot more than what the market does.

    Old saying:

    “it’s worth what someone is willing to pay”

    At this point ignoring that simple fact is pretty tantamount to getting in on the bottom……based on your opinion you’ve got some really relevant experience buying the bottom……almost 12 times already!!

    The market has spoken about these instruments and has given it’s answer…..you don’t like the answer??? Well get in line as the entire banking system is in denial along with you.

    Good luck with thy head planted firmly in thy ass.


  59. mw commented on Mar 31

    The Ultimate Mega Bank– the FED, the lender of last resort is taking all this garbage paper… can we have a “RUN” on the “FED” by other countries… I think so..

  60. DoctorOfLove commented on Mar 31

    Mark to market presupposes you have a functioning market. That, in short, is the problem with mark to market on both sides, when you have panic buying and panic selling.

    For those of us who like our currency and financial markets stable, mark to daily market is actually a bad idea, and makes bubbles and collapses worse.

    Asset holders who are simply holding see their income and net worth rising rapidly during panic buying phases, while standing there doing absolutely nothing. Then financial analysts give them hell for low returns on capital, the phoney baloney capital caused by the panic. Then they see their income and net worth collapsing when the bubble pops, again, while standing there doing nothing. Then financial analysts give them hell for have such crappy current earnings – again, while doing nothing.

    Panic selling no more accurately prices assets on the downside than panic buying does on the upside. This is particularly true of long term holders (life insurance companies, pension plans) who are matching long term liabilities with long term assets, and have every intention of holding much of their debt instruments to maturity. Why, exactly, are their financial statements made more accurate by reflecting the temporary lunacy of 32x leveraged hedge funds, in either direction?

    Thus, when you say mark to market, what market are you referring to? The collapsed real estate market of 92-93, or the smart money market of 95-96, where GE and the gang bought up the “accurately market priced” real estate assets of 92-93 and made a killing selling the very same assets two years later? Which market was right?

    I think financial institutions ought to value for reporting purposes their financial assets on a 52 week or 78 week rolling average, precisely to mitigate pressure to do stupid things on the upside and panic behavior on the downside, and if they did, it would be to a fair degree a self-fulfilling prophecy, as upside and downside pressures were reduced – And The Market Price Swings Would Drop. Which would then be the new market, and the “lets mark everything to whatever ever that etrade baby thought three seconds ago” crowd would be happy, although they wouldn’t know or understand why.

  61. Winston Munn commented on Mar 31


    You are reading my mind. I intended to post the other day but never got around to it that it is odd how the cabal in power who proclaims free market beliefs and worldwide democracy has always for an answer increased centralization of power.

    To touch on the political side, it may be a value to grasp the underlying dogma behind the neosonsevative movement – the writings of Leo Strauss.

    Radical change does not require conspiracy; it requires only a handfull who hold similar beliefs who are placed into positions of power.

    And to chime in on the Fred/MS/Estragon debate, I see both sides as right. MS is correct that the asset value is what it will sell for today – but that is only of meaning to someone wishing to or needing to sell today; the underlying value is determined, as Fred says, by the collateral value, and for those who are not sellers of the asset, the value may in the future fluctuate – either up or down.

    And that is the main problem right now with ABCP – no one knows what the underlying collateral is worth or will be worth, unless the bid is so low as to ensure profit in worst-case scenarios.

    Unknown risk cannot be priced.

  62. pft commented on Mar 31

    Interesting article below on the dangers of fair value accounting. It will give companies the means to Enronize investors.
    These rules will also apply to non financial companies as of next year on their financial assets. Today we may see the new rules as deflating the value of a companies assets, coming at a time where the housing bubble has burst, but it also can be used to ficticously inflate assets.


    “Accounting theory is undergoing a major conceptual change, and the most recent manifestation—the application of Level 3 fair value accounting under SFAS 157—has the potential for widespread deception of investors.”

    “…the SEC handed Enron the tools to abandon traditional principles and introduce the bookkeeping analogue of financial engineering into nonfinancial companies. Enron eagerly applied the tools and soon began discounting to present value as much as 29 years of income from customer contracts. The result, after considerable manipulation, was instantaneous increases in assets and offsetting equity and, of course, income”

    “What [accounting authorities (SEC, FASB, IASB)] do not appear to recognize sufficiently is that numbers that are likely to be manipulated by opportunistic or overoptimistic managers are considerably worse for investors than numbers that are not current. Consequently, the authorities have required fair values, at least for financial assets, even when they are not based on reliable market values.” ”

    Unless the companies designated accountants are “subjective valuation specialists”, how will they be able to audit and contest the companies “models” of an assets worth when there is no market. They won’t, and will just have to accept whatever garbage is given them.

  63. A Dash of Insight commented on Mar 31

    SEC on Marking to Market: Another Problem Solved

    A major market problem relates to how financial institutions must recognize the value of securities that are not trading in a liquid market. The financial assets include complicated securities including various tranches of mortgage debt. Everyone agree…

  64. Dwight Cass commented on Apr 1

    Mark to myth: Bank losses may soon be lot harder to estimate. The US Securities and Exchange Commission has opened what appears to be a loophole in the accounting rule that governs when companies must use market prices to determine asset values and when they may use internal guesstimates. The rule was far from perfect. But giving banks more leeway may further undermine confidence in their accounts – and may prolong the credit crunch.

    The rule, called SFAS 157, divides assets into one of three buckets based on the extent to which they have observable market prices. Level 1 assets are those that can easily be marked to market; Level 3 are not traded at all, so management gets to cook up the values. Level 2 assets are somewhere in the middle.

    Since the rule came into effect in November, some banks have categorized big chunks of their holdings as Level 3. That is enough of a concern for investors and counterparties worried about the true worth of Wall Street’s assets. And even the market values used for Level 1 and Level 2 assets can appear suspect – banks vary widely in the markdowns they apply to traded mortgage bonds and leveraged loans, for example.

    Further deepening the murk, the SEC now says banks can diverge from observable market prices when those are the result of a forced liquidation or distressed sale. But that describes most of the assets at the centre of the credit storm. Leveraged loans, CDOs, even top-rated mortgage bonds being offloaded by the likes of Thornburg Mortgage, Carlyle Capital and KKR Financial could therefore all qualify for special treatment.

    Granted, mark-to-market accounting has its drawbacks. It’s arguably pro-cyclical, values get pushed around by the ebb and flow of liquidity, and banks already have a lot of scope to choose which prices to use. But still, giving firms the ability to tweak values even more could further erode the already fragile confidence in their financial reports. That could keep inter-bank lending tight and make it hard for banks to raise the equity capital they need – which is just what regulators should be looking to avoid.

  65. Berk commented on Apr 1

    Mr. Norris simply mis-read the letter.

    It may have been poorly worded, but it said that if, if possible you should use comparable market transactions to value your holding. But if one or more of the comparable transactions are liquidations or foreclosures, you can ignore those particular comps.

    It does not say that if your holding is in foreclosure you can ignore reality and not reprice it.

    This is a common-sense directive, just as if you were valuing your house. In this analogy, you’d use your neighborhood sales transactions, ignoring any foreclosure transactions in that group.

    Same thing with other valuing assets — that’s what they are saying.

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