Tuesday, September 30, 2008

Mark to Market Accounting Clarification from the SEC

Reuters reports No need for Fire Sale Pricing which very possibly would've saved Wachovia Bank (WB). The substantial marks taken by JPM on the WM loans all but doomed WB. Now the SEC claims that a distressed sell wouldn't be classied as a market between willing parties and wouldn't count as a 'market'.

  • U.S. securities regulators provided initial guidance on fair value accounting and reminded financial services firms that they don't need to use fire sale prices when evaluating their hard to price assets, according to a document first obtained by Reuters on Tuesday.
  • U.S. accounting rule makers assume that fair value inputs are based on an orderly transaction between willing market participants. The SEC release indicated that the agency does not believe distressed, or forced liquidation sales are orderly transactions.
  • The SEC's guidance says that sometimes the level 3 inputs may be more appropriate than the so-called level 2 or observable inputs.

This is a good sign for stocks like MS and RF that could be ravaged by mark to market fears. Long term both stocks seem strong if they can get through this period. Both posted strong profits last Q and should be able to continue as long as they don't have to take distressed marks and this SEC clarification should help ease the accountants push to take overly conservative marks.

Disclosure: Long both MS and RF in personal account.

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