Where's the Bloodbath, FASB?
The unwashed masses never cease to amaze me. A few well-placed headlines and assurances that everything is under control and we're out crawling the malls and charging up more crap that we don't need.
An oldie but goodie from Gary North, this March 2009 piece takes FASB to task, while offering a pretty sad reflection on the power of perception (FAS 157 and the Looming Bloodbath):
The continuing crisis in the economy has not yet produced panic. The malls are filled. There is a slowdown, but the politicians and Bernanke have calmed the voters. Bernanke’s appearance on 60 Minutes on Sunday evening was unprecedented for a Federal Reserve Board Chairman. The interviewer, Scott Pelly, asked only softball questions.
Bernanke said that the recession will probably end this year, but unemployment will continue to rise.
The average guy in the street does not care about the technical details of the National Bureau of Economic Research’s evaluation a year after the fact regarding when the recession ended. What he cares about is his job. The news on the employment front remains bad and will get worse.
Whether the FASB’s revision of the rule it laid down will reverse the present decline in asset values is problematical. I don’t think it will. The break in public confidence has been too great. The bonuses have been too large. The system, regulated to the hilt, created a license to loot. Even tighter regulation will now turn the capital markets into the Post Office.
The SEC’s lawyers thought a bunch of accountants could save the day. They couldn’t. They made the day a lot worse.
I'm sorry but this sort of realization should be inspiring riots on Main Street.
The lower you go on a balance sheet, he said, the more intangible the asset. Intangible assets are not easily priced. On the liabilities side, "we all have problems, especially these days, with sign-offs by auditors."I don't know about the sheeple but that particular line sends a chill down my spine. Can anyone confirm just how fucked up this is or is it only me?
The auditor deals with the past. The valuation specialist deals with the future: "the seer’s, if you will, perceived present value of future benefits, however defined."
In Mises’ terminology, this is the difference between economic history and entrepreneurship.
The current crisis has revealed the weaknesses of FAS 157. Two fatal errors that in this crisis we’ve been dealing with for over a year now had the effect of essentially pouring kerosene on the avoidable bonfire that is clobbering all of us.
The first error is that the new rule puts "downward pressure in falling markets." The second error is that it ignores the subjectivity of valuing assets.
FASB overturned a hundred years of practice when they established something called "fair value," and it overturned something called "fair market value."
How did this come about? Miller pointed the finger at the Securities & Exchange Commission. The SEC told the FASB not to let another Enron take place. The FASB complied. Miller’s assessment was on target: "In the current circumstances, Enron is chump change."
Fair market value assumed the following: a willing buyer and a willing seller, neither of whom is under compulsion, and both of whom "having reasonable knowledge of relevant facts." He said this constitutes an entry price.
In contrast, fair value assumes that a price received takes place in "an orderly transaction by market participants at a transaction date." It is an exit price.
An exit price is not a problem when markets don’t seize up, he said. It is a problem when they do seize up.
Farther down the balance sheet, "the idea of market participants becomes a mirage."