Correctly Political Action Alert: Can We Stop The Deepening Fraud of "Unobservable Inputs"?!?

[jfxgillis]

Money Quote:

The hearing ended with Kanjorski threatening to pass legislation to force Herz to loosen standards. In fact, the pressure was so intense that the FASB. The pressure was so intense that the FASB announced the new rule after only a week. The Chairman of the full committee, Barney Frank, seems to have accepted it as a foregone conclusion. This is absolutely unacceptable. Democrats pressing for this, like Paul Kanjorski and Gary Ackerman, need to stop. Go-along Democrats like Senator Christopher Doddand Barney Frank need to stop going along. As a Democrat myself, I can complain about the Republicans all I want but the fact remains, the Democrats hold power and it is only because of pressure from Democrats that this loosening is being rushed to implementation. At the end of the day, loosening mark-to-market will only allow the fraud that is the current financial system to be perpetrated, er, I mean, perpetuated.

More:

Correctly Political Action Alert: Can We Stop The Deepening Fraud of "Unobservable Inputs"?!?

[terisan]

1. Great Explanation of "mark to market." nt

[JohnWxy]

2. the use of "Unobservable Inputs" is part of Rule 157 and necessitated by the abssence of

a continuous market in the asset or security being valued. There is not, and never was a continuous, running market in CDOs. If there was, determining the market value would be easy. Just get a quote on the security or a security of similar class (risk, maturity). The use of "unobservable Inputs" is necessitated by the use of Mark to Market where there really isn't a continuous market ih the assets being valued.

http://www.fasb.org/st/summary/stsum157.shtml

This Statement emphasizes that fair value is a market-based measurement, not an entity-specific measurement. Therefore, a fair value measurement should be determined based on the assumptions that market participants would use in pricing the asset or liability.

As a basis for considering market participant assumptions in fair value measurements, this Statement establishes a fair value hierarchy that distinguishes between

(1) market participant assumptions developed based on market data obtained from sources independent of the reporting entity (observable inputs) and

(2) the reporting entity’s own assumptions about market participant assumptions developed based on the best information available in the circumstances (unobservable inputs). The notion of unobservable inputs is intended to allow for situations in which there is little, if any, market activity for the asset or liability at the measurement date. In those situations, the reporting entity need not undertake all possible efforts to obtain information about market participant assumptions. However, the reporting entity must not ignore information about market participant assumptions that is reasonably available without undue cost and effort.
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Merk to Market not appropriate where you intend to hold asset to maturity.

If you have an investment you intend to hold until maturity it's valid to carry it on your books at the Present Value of the expected stream of payments (from bundled mortgages in the case of a CDO). This stream of payments can be factored by any risk of default for which an objective measure can be determined. NOte that if the CDO contains several thousand mortgage contracts and you determine 10% (backed up with an objective measure) are estimated will default (with time periods for default considered) then the value of the income stream should be adjusted accordingly.

[jfxgillis]

3. Um. Not rilly

John:

The ABX Index has been in existence since 2006. And if, as Atrios has pointed out, the lack of "market activity" is because the ask set is too high, then you create a self-fulfilling prophecy in which you then employ unobservable inputs.

Moreover, even your defense by necessity relies on the reporting entity's reliance on it's own assumptions in setting fair value and that is a recipe for disaster. Those assumptions will always be biased in the reporting entity's favor and even the tiniest bias means that the model will inevitably fail.