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As You Like It

Wednesday, 16 Apr 2008 | 3:41 AM ET

... Burlesque in one Act by the U.S. Securities & Exchange Commission

based upon the Sample Letter Sent to Public Companies on MD&A Disclosure Regarding the Application of SFAS 157 (Fair Value Measurements).

Ok, ok, this has NOTHING to do with Europe or with something the €urocentric should be pontificating about. But when I read (admittably a month late and after some outpointing by a head-shaking, disbelieving CIO from a German bank), I couldn't quite believe MY eyes either.

In its untiring efforts to put more transparency into the markets - ahem - and to help banks through these turbulent times, the SEC issued above-mentioned Sample letter to shareholding companies ... as one may read there: "In March 2008, the Division of Corporation Finance sent the following illustrative letter to certain public companies identifying a number of disclosure issues they may wish to consider in preparing Management's Discussion and Analysis for their upcoming quarterly reports on Form 10-Q. "

Sit down, fortify yourself with a cuppa coffee (or something stronger, IF you are of a less than steely-nerved disposition) and read the whole oeuvre. From the first letter to the last full stop. And once you have recovered from jaw-dropping, head-scratching amazement, rubbed your eyes and read it a couple times again :... Don't quite believe what you've read there? Better DO believe it, because it might SOUND like satire, but I assure you - it isn't.

There you may read: "Under SFAS 157, it is appropriate for you to consider actual market prices, or observable inputs, even when the market is less liquid than historical market volumes, unless those prices are the result of a forced liquidation or distress sale. Only when actual market prices, or relevant observable inputs, are not available is it appropriate for you to use unobservable inputs which reflect your assumptions of what market participants would use in pricing the asset or liability."

In simple words: As long as the markets are functioning well and liquid, you should use market-to-market evaluations - Fair enough.

And when the markets are illiquid, not functioning, "when actual market prices ... are NOT available" you may evaluate AS YOU JOLLY WELL PLEASE - provided, of course, you can make a plausible case for it - or so one hopes at least.

So, just to recap: When there are NO problems with market-pricing, no problems with liquidity and everything with your ABS, conduits, SIV or whatever is just about honky dory - when prices are just fine, you should use "to market" evaluations as fair value.

When the going gets tough, the market dies up or collapses, when perfectly decent securities might be prices as ZERO by the market ... well ... then you may evaluate them with what YOU consider fair value - never mind whether that price might be rooted in cloudcuckooland or not.

Good news for harangued bank treasurers, bad news for that much-demanded and indeed urgently NEEDED transparency! ... Creative, flexible accounting and accounting rules instead of a realistic, let alone conservative of worst-case-scenario pricing in of risks.

Gee, I wish I could do the same with MY assets - like the perfectly beautiful house I have been trying to sell for three years. The market for real estate in my neck of the woods being ab-so-lute-ly illiquid ... so as actual market prices, or relevant observable inputs, are not available, I should be able to "use unobservable inputs which reflect your assumptions of what market participants would use in pricing the asset or liability."

All I have to do is convince MY bank of MY assumptions and MY market-to-model evaluations.

Whaddaya reckon my chances are?

Remember that proverbial snowball and its chances in hell? - I think you get the picture.

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