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The AAO Weblog covers accounting issues and current events as they relate the practice of investment analysis.

 
 
Mar 17

Written by: Jack Ciesielski
3/17/2008 12:20 PM 




Well, this will be on everyone's mind today. Remember - it shows closing prices through last Friday, when the stock was $30:

  
No doubt, there will be catcalls about mark-to-market accounting because of this. Many critics will say the balance sheet smelled because Bear Stearns held $46 billion of mortgage investments as of the end of November (maybe the last balance sheet we'll ever see for the storied company.) Of those $46 billion of investments, $29 billion were valued using Level 2 inputs and the remaining $17 billion were valued using Level 3 techniques. And with just wild estimates of fair value on their balance sheet, nobody knew what Bear was really hiding and nobody had faith in their balance sheet, and who would dare lend to them without Uncle Sam stepping in, and so on.

One of my early mentors in accounting liked to warn me that "with some folks, a little knowledge is a dangerous thing. And they often prove it." He's so right in this instance. Observers who have learned the fair value hierarchy three-step act as if carrying securities at fair values - even if you have to guess at what they're worth - is something new. It isn't - what's new is that firms now have to tell you how much of the values are mere guesses, and the degree to which they're guessing. Statement 157 didn't require broad new classes of instruments to be reported at fair value - it just required more information about the ones that have been handled that way. For years.

In fact the last accounting standard requiring fair value treatment to be applied to a broad class of financial instruments was Statement 133, "Accounting for Derivative Instruments and Hedging Activities" - way back in 2000. That one didn't seem to touch off any financial meltdowns. Yet  ignorant observers of Statement 157 - which doesn't extend fair value reporting - are blaming it for everything except global warming. A little knowledge really is a dangerous thing.

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