In a move that will only cause more confusion in this chaotic time, the SEC provided “clarification” today on how to apply mark to market valuations. In their “clarification” the SEC now says:
reminded financial services firms that they don’t need to use fire sale prices when evaluating their hard to price assets.
OK, but what if the only sales currently, and that have for a while, are only fire sales? Then what do you do?
Further in the Reuters article is the quote that sums up my impression of the SEC’s “clarification.”
“This letter (SEC document) could be titled, pick a number, any number, as it gives bankers great leeway in choosing what numbers they will give to investors,” said Lynn Turner, who served as chief accountant at the SEC from 1998 through 2001.
While “picking any number” will allow you to finish your quarterly financial statements it has some huge negative potential; jail time.
Following the Enron debacle, Congress decided they were going to ensure that accounting standards were so tight that no one could “game the system.” Their fix was called Sarbanes/Oxley. Sarbanes, as it is generally referred to, did many things to tighten accounting rules. It also significantly increased accountability for management. Sarbanes has criminal penalties i.e. jail time for company executives who falsify financial statements.
Under normal circumstances, estimates provided by industry experts i.e. company executives, would be acceptable and pass without comment. However, in the current, hypersensitive environment, “estimates” are easy targets for overly ambitious prosecutors who are working in a situation where everyone is looking for someone to blame.
The SEC’s “clarification” didn’t clarify anything. If anything, it muddied the standard even further. The SEC should suspend mark to market for these specific asset classes. Only by setting the requirement aside or by providing indemnification for good faith efforts, will these companies find any relief from the mark to market requirement.
A couple of weeks back, as the current crisis unfolded, John McCain called for the firing of the SEC chairman Chris Cox. At the time, many people scoffed at McCain saying that he was reaching and over reacting. Based on this latest cluelessness on the practical implications of his own decisions, I agree with McCain! It’s time for Cox to go.
Just to make you feel really good, Cox is one of the four people outlined in the bailout (yes, it’s back to that with the extra crap that got thrown in) bill who is to oversee how the $700B is spent!
We’re in soooooo much trouble!
Ummmmnnnnn….no.
Cox is a straight shooter who recognizes that SOX’ ‘mark-to-market’ rule has implications which are insane. You pointed that out very well. In effect, m-t-m criminalized good-faith estimates.
But suspending the rule is impossible. It’s a LAW, not just a regulation.
The SEC did make one huge mistake–allowing Bear/Lehman/Goldman to leverage 30x rather than 12x on some instruments (notably swaps and CDOs.) But I’m not sure it was during Cox’ reign.
Dad,
There is a difference between a “straight shooter” who is even a “smart guy” and one who is able to lead. I don’t see Cox as a leader…hence your point of allowing the excess leverage. yes, I know it’s a law but if Cox was serious about dealing with it he likely could have the President set it aside temporarily on Executive order or could have gotten it in the Senate bill. Unfortunately, he has shown no leadership on either front and instead put out this “clarification” that is anything but.
Everytime I see Cox or Paulson, I have this flashback of “Heckuv a job Brownie!”
Cox wasn’t on SEC when the net-capital rule was changed. (2004) That was done by Commissioners who are no longer on the SEC.
Cox MAY have seen the need to change the rule–but when? If you assume that things were going OK until (say) 6 months before Bear collapsed, then he’s only had about 60 days in which to change the rule. Leader or no, that’s a very brief window.
Presidents cannot “EO” changes in law, Shoebox. And if Cox wanted to attach m-t-m suspension to the current proposals, they STILL are not law.
Dad, a clarification, Sarbanes/Oxley is a law, mark to market is not. Mark to market as is currently interpreted, came via FASB pronouncements…I believe FAS 157, which first came to be as of 9/06. FASB statements get changed all the time. The SEC generally requires that financial statements are completed in accordance with FASB pronouncements but they do have the authority to override those and in fact, does sometimes. The last one I can think of, that was significant, was when the stock option standard was implemented. Sometimes the SEC will delay implementation dates but they do have the authority to side step FASB pronouncements though generally don’t. In fact, the SEC is not obligated to use any FAS but chooses to use FASB as the “authoritative standard” for what defines acceptable accounting standards for SEC reporting.
I just noticed that Section 132 of the Senate version of the Bailout, although the language is cludgy, puts a reminder to the SEC that M to M is their decision. The following section 133, tells the SEC to do a study to evaluate the impact of M to M on the current financial issues.
Sorta. See: http://en.wikipedia.org/wiki/Sarbanes-Oxley_Act
Here’s a case where the Legislature is evading responsibility for what it did by passing the blame (Shock!!)
Under Title IV of SOX, the SEC was charged with making the rules (eventually, FAXB 157) which implemented the Act.
So yes, SEC could unilaterally suspend the rule, or modify it as it has recently done. But would you suggest that the SEC actually DO that, given SOX legislation?
IOW, Congress set up the SEC to fail on this no matter what happens.
Dad,
I see what you’re saying…However, Title 4 doesn’t address mtom. Actually, the practical implementation of 4 were the items listed in Wiki most notably was that auditors now had to test and report on internal controls where previously they could pick and choose when to use I/C versus other methods like balance confirmation for say debt. That said, there is no doubt that the environment of “higher scrutiny and accountability” that came from Enron and Sarbanes was part of what drove FAS 157.
I will agree that Congress required something that they did not have full understanding of and that in this case, they have at best created confusion and at worse, contributed to setting up the SEC to fail.
Yes, I still believe that Cox could suspend MtoM if he chose to…he should have done it after Bear Sterns. In fact, his “clarification” is attempting to do just that but has left the situation so murky now that it will have no impact. it may be too late at this point.
Thanks for the debate…iron sharpens iron!