I've been saying for the last few weeks that FASB 157 has a hand in this crisis. Newt Gingrich, no matter how much you might disagree with his conservation political views, has made a good point.
On an unrelated but amusing note about the bailout... I always listen to Big Boy's Neighborhood on Power 106 every morning on the way to work. It's not the most intellectually stimulating show. Ok, it's down right dumb sometimes, but Chuck needs to let out his ghettoness once in a while. Today, they briefly touched on the failed bail out proposal. Over the past few days, I've heard many talk shows where the callers would call in and whine about how this would not affect them and let the Wall Street fat cats suffer. But unlike those callers, Big Boy realizes that the bail out package, no matter how unappealing it is, is needed. He explained in layman terms how everyone will be affected by it, from small business to student loans. I give him mad props for have such a good understanding the situation and educating a lot of his audience on this situation.
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Mille m...
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There is the other side of M2M accounting: you can leverage like crazy on the way up.
I'm not sure how much effect suspending the rule will help out. Not that I completely diasgree with Gingrich points per se, but when Lehman went under and had to reprice their MBS at a level lower than anyone else, investors immediately punish all the other financial stocks accordingly without an immediate markdown. Part of that could be a simple reaction to the upcoming markdown, but I suspect a good chunk of investor suspicion will be tere with or without the accounting rule...
The timing of the new rule implementation had something to do with this also. I think it began in 2007, so the rule changed in the middle of the game, but I'm not sure how things would have change differently if the rule was implemented earlier...
I agree that there would have been sympathy price drops regardless. But what M2M did was make that suspicion into reality, even if the suspicion is baseless. Eventhough the markdowns does not involve cash, it could trigger credit events, credit ratings loss, regulatory obligations that would require more cash.
Before FASB 157, there was not enough transparency for these types of assets, which could lead to accounting shenanigans. But with the rule, the tide might have gone the way of too much transparency, causing unnecessary panic at times. A happy medium is needed.
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