Another mid-game SEC rule change

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Getting back to Chris’s original observation, I’d like to offer the following.

I think the SEC’s announcement is closely related to the off again-on again bailout plan still before Congress. Note that under the mark to market rules, assets can only be classified as “Level III” assets and valued based on management’s best judgment as to likely future cash flows if there is no active market for that type of asset. Currently there is no active market for mortgage-backed securities, so holders have a great deal of leeway as to the value that they put on them. If management’s best judgment turns out in hindsight to be overly optimistic, who is to say that it wasn’t reasonable in light of the limited information available at the time it was made?

However, $700 billion makes a pretty active market. If banks which now classify their mortgage backed securities under the Level III rules were forced to re-value any such assets they still hold based on the prices that the government actually pays the banks, they might have to do some pretty serious write-downs. Take another look at Chris’s table to see what that would do to the capital of some of our largest banks. The loss of capital would force the banks to curtail lending even further, which is just the opposite of what the government hopes to achieve.

Thus the significance of the following paragraph from SEC’s press release (which was issued in question and answer format).

“Are transactions that are determined to be disorderly representative of fair value? When is a distressed (disorderly) sale indicative of fair value?

The results of disorderly transactions are not determinative when measuring fair value. The concept of a fair value measurement assumes an orderly transaction between market participants. An orderly transaction is one that involves market participants that are willing to transact and allows for adequate exposure to the market. Distressed or forced liquidation sales are not orderly transactions, and thus the fact that a transaction is distressed or forced should be considered when weighing the available evidence. Determining whether a particular transaction is forced or disorderly requires judgment.”

In other words, banks will not be forced to base their values on the actual sales prices, since the sales will be deemed “forced or disorderly”. They are still allowed to use a considerable amount of “judgment” in determining values.

Note that although I am an accountant, I don’t work in this area, and I have only read the SEC announcement once, so this is something of an educated guess on my part. Still, it certainly seems to fit the current fact pattern. If anyone who is really an expert on this can enlighten us further, I would appreciate it.

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This is the only site I subscribe to. I have been near panic and over a week ago cut all news sources except this one. The only strength is diversity and no one has to or will read every post - I agree with Chris’s open policy because amongst anyones poo may be some useful manure. Don kiwibog.com

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I do agree with you pir8don,

This way it is far easier to help others understand issues, and learn things yourself. I understand that there is alot of rubbish at times, but that can be put down to the fear and confusion people have at the moment. That will settle down.

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Thanks for your support. I gained my degree 30 years ago with majors in Philosophy, Social Anthopology and Politics. I see many people on this site that are very close to the action. To my mind it is time to look at the situation from a philosophical point of view. Chris has an excellent crash course that covers most of the detail but I would like to see a forum place to discuss philosophy where I might just talk to myself but at least clarify my thinking and maybe engage others. I have been left by circumstances with time to think and hope I have something to contribute to the discussion. Even though I am on the other side of the world (Aotearoa NZ) I know our "leverage" is just as high as the US and that where they go so will we. Even with our small population (50 thousand locally) I dread what will happen when the oil stops coming and the supermarket shelves have no food. We will have no time to grow, few skills and little land left. I’ve run our home on solar and stored heaps of food - use a tank of gas every two months but none of it will allow my partner and I to live near starving people.

The only idea I have had is that we should form groups with our neighbours but cap the size at 100. Discuss the situation and hopefully act. No leaders and only act on concensus. The neighbours I have discussed this with so far agree but I have chosen the most likely first.

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Fabio, thnaks for post. Unfortunately Economics is not my strength (catching up as fast as I can) I’m in UK so even more difficult. Could someone put in real easy lay terms. I think I understand the gist but I’m sure others would appreciate any explanation, analogy, . . . .

Thanks again guys.

Also - observing from UK I get the impression that this time ain’t nothing going to stop the bill. Evevery where people are reporting that yes there are still lot’s of people complaining [One radio show mentioned with the previous amended Bill a Senate had 1000 calls and only 3 for the Bill] but this time people are getting desperate because they now realise that loans are hard to come by.

FYI - I can’t remember seeing a single article in main UK press that really opposed the original Bill - my impression wa that all said it had to go through, for example on BBC a ‘reporter’ asked what happens if the Bill is not passed and the ‘economist’ reply was "You don’t even want to go there!". Bloomberg (UK) has faired only slightly better IMO.

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Hi logBurner,

I am a so called "financial professional" from Germany, but believe me: 95% of my colleagues is as clueless a our politicians or us ordinary citizen on that subject. I happen to be one of perhaps 1000 libertarians in Germany, so Im used to "Austrian Economics", but the speed of changes in the last weeks has completely overwhelmed myself. Ive posted the article hoping that Chris would comment it, if he thinks it is important. To me it sounds like the FED is taking away all the limitiations to just plainly print the money. I don`t understand all the talk about the Bailout-Plan, because in my view the FED does not really need it. I think they do it for the foreign investors who threaten to dump the toxic "assets" otherwise. Now they can dump it on the american citizen.

Our media is also 100% in favor of bailouts and it talks about the opponents as if they where a bunch of selfish rednecks (perhaps a collateral damage of the US republicans having behaved like that the past eight years).

Cheerio

Fabio

PS:

I hope in the Brits like UKIP and the Ron Paul Americans for a real change. Germans are religiously following the State as they always do, so do not expect anything constructive from us.