No Runny Eggs

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!