Monday, September 29, 2008

Cutting Off Your Nose to Spite Your Face

As of this moment (2:50 PM eastern) the House of Representatives has dealt a huge blow toward stabilizing the financial markets and avoiding a world economic crisis. The less than perfect Paulson bill would have accomplished that goal in numerous ways. One of them, which has been least understood and grossly underappreciated by most other than those who read this blog, is the method by which the Treasury and the Fed would have finessed the rules and stopped the gasoline that turned a house fire into an inferno – FAS 157.

The Paulson plan’s tourniquet that would have stopped the writedown bleeding is mark-to-maturity, the plan’s component that would have enabled Treasury and the Fed to finesse the insanity of FAS 157’s mark-to-market and ceased the graveyard spiral of lower values, more capital, forced sales, lower value, etc.

What Now?

There is still time for the House to come to its senses and immediately pass a bill that would be far better than the alternative of no bill. On the assumption that such an action did not occur, however, then financial assets and therefrom the world economy will suffer the consequences the likes of which are extreme in the best case.

Yet, there is an alternative, an action that could help alleviate the carnage, one that comes from the source of the carnage – FASB. A repeal or more likely a suspension of FAS 157 would go miles toward accomplishing what the Paulson plan would have achieved – stopping the graveyard spiral in asset values.

As for the odds of that happening, the answer is simply “who knows?” However, the consequences of no action by either the House or FASB are frankly unthinkable. Let’s pray for less principled outrage and more adult, common sense decision-making.

1 comment:

MaddMax said...

What would you suggest regarding the FAS 157? If "mark-to-market" is not working then how do you either fix it or replace it with a more appropriate standard in determining the 3 different Asset levels for a company?