Heads Up on Cox

We should all be interested in how SEC Chair Christopher Cox is responding to the Congressional mandate to review the misguided experiment of FAS 157 — the determination to use the worst possible price of any thinly-traded asset to destroy the balance sheet of any financial institution with a similar holding.

Congress gave the SEC ninety days, and the independent regulatory agency is taking the maximum time, reporting on January 2nd.  Today's speech by Cox, in front of an accounting group, may give some hint of the study findings.

The Wall Street Journal says not to expect anything significant.

The President cannot fire the SEC Chair or any member.  Terms for the five members expire each year in June on a staggered basis.  The partisan split must be kept at 3:2, with the President naming the Chair.  Cox has stated that he will resign when a new President takes office, perhaps waiting for a replacement to be named.

Let us hope that the President-elect has a candidate in mind.

There is a reasonable solution to the question of complex assets — providing both visibility and more realistic valuation.  If and when this problem is fixed, it will be the single most bullish event for US equities, ending the death spiral where assets are destroyed faster than TARP money can be added.

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  • Jeffrey Levin December 8, 2008  

    I would once again like to point out the contrarian viewpoint from the industry point of view. For full disclosure, I am a partner at a CPA firm.
    As I have discussed with you in the past, I believe Fair Value accounting for financial assets and liabilities to be the far superior method of accounting vs historical cost base accounting. And here is where i disagree with your point of view. It’s not the fair value standard that has been the problem. It has been the poor implementation of that standard. I have read Mr. Issacs comments and once again believe that he also has failed to make this important distinction. Instead of throwing out the better standard because we, and yes, the fault lies with all of us, both external CPA’s and internal accounting personnel for failing to make the tough choices.
    Instead of throwing out fair value, i believe a few changes will make it far more valuable; (1) modify the exit pricing requirement for all assets other than those that truly trade in a liquid environment (US Treasury securities, stocks of S&P 500 companies) to something in between entry and exit pricing, (2) strengthen the guidance given for identifying distressed markets (3) give more stringent disclosure requirements when assets are moved to Level 3 because of distressed markets. Also, when moved to Level 3, give additional guidance and possibly give safe harbor protection (i will get to this later) for that additional disclosure and valuation methodologies, including using cost when all else fails.
    One thing that Mr. Issacs did mention and which does compound all of these problems is the fact that the internal and external accountants are under tremendous legal liabilitiy exposure. Just ask newly minted Arthur Anderson Partners from 2001 what that exposure looks like to personal balance sheets. Its extremely easy to second guess us when an entity has failed and the bondholders and shareholders want their pound of flesh. If you write the assets down to zero, no one can fault the accountants, right?
    Kind Regards
    Jeffrey Levin

  • Jeff Miller December 8, 2008  

    Jeffrey — Actually, I think I am in complete agreement with your very thoughtful comment.
    I have said on a few occasions that this is a well-intentioned idea, poorly implemented at the wrong time.
    Most traders and pundits — including some of my most astute colleagues — still believe that accountants will do the bidding of the companies. They are suspicious of all Level III assets.
    Perhaps I’ll follow up with a full article. Meanwhile, I always appreciate strong contributions such as yours.