American Banks ask SEC to give them a fair deal

Well to be honest, i guess Fair value accounting was reserved more for columnists and bloggers like us, rather than to be used practically.

In the latest dent, the American Banking Association (ABA) has asked the SEC to step in and override the controversial FAS 157. In a sharp critique, the ABA has gone after FASB' staff position 157-3 arguing that the revised guidance by the FASB still requires banks to mark-to-market assets at fire sale prices. "Given the importance of this issue, the impact it has on the crisis in the financial markets, and the seeming inability of the FASB to address in a meaningful way the problems of using fair-value in dysfunctional markets, we believe it is necessary for the SEC to use its statutory authority to step in and override the guidance issued by FASB," Edward L. Yingling, president and chief executive officer of the ABA wrote in a letter to SEC Chairman Christopher Cox.

I am not sure what the FASB's revised guidance (FSP 157-3) was set to achieve, after taking more flak than any other accounting pronouncement, the revised guidance should have addressed the needs of the current market situations, rather it has complicated to level beyond compare. This is why

• The revised guidance did away with the requirement of mark-to-marking distressed assets at exit prices - Kudos to this (the BIG 4 were against this)
• Distressed assets were to be valued on a composite valuation model to reflect the true value of the assets. This is a much required guidance, as in illiquid markets, the best way to mark-to-market is on the basis of the holding capacity of the investor rather than the market condition - kudos to this
• In calculating the fair value, the valuation model must factor in the liquidity risk of the asset........did i hear it right THE LIQUIDITY RISK........... ain't this a circular error.

On one hand, the pronouncement does away with the requirement of fair-valuing the assets at fire prices in an illiquid market, but at the same time requires valuation models to include the impact of liquidity risk in valuing this assets. Whats the difference.....does the need to value distressed assets arises in liquid market or illiquid markets.....

Well a silver lining, the DOW Jones is up 11% at the time of writing this blog, here's hoping we get out of this illiquid mess and FAS 157. SEC its upta you