Monday, September 03, 2007


Mark to make-believe

Funny accounting rules have allowed financial firms to hide mortgage related problems.

Then there's Level 3. Under Statement 157, this means fair value is measured using ``unobservable inputs.'' While companies can't actually see the changes in the fair values of their assets and liabilities, they're allowed to book them through earnings anyway, based on their own subjective assumptions. Call this mark-to-make-believe.

Who thinks that this is a good idea? The whole point of marking assets to market is to force firms to be honest about their liabilities. This is why Bush's No Bad Investment Left Behind plan is not going to help. The problems can't be confronted if they can be ignored. Not just homeowners but bankers are going to fight hard not to have to face reality. In fact, I am sure that they will not admit their problems until it is too late to prevent the blow up. It's human nature.

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