Financials rallied on Tuesday on news that the SEC is working with the FASB (Financial Accounting Standards Board) to revise fair accounting rules.
The likely rule under discussion is known as FAS 157 and deals with mark-to-market accounting which requires financial firms to value assets based on what they could fetch in a current market transaction.
New rules requiring broader use of the standard have been partially blamed for forcing banks to take big write-downs on the values of assets affected by the credit crunch.
“I would not say this is a revision in the rules it’s a clarification of the rules,” explains CNBC’s Matt Nesto on Fast Money.
Currently, there are three levels of assets.
Level 1 – on the market and there’s a price
Level 2 – Observable inputs
Level 3 – Unobservable inputs (you try your best to get the price)
The FASB is saying judgment can be used in determining how to apply these criteria.
But as soon as we introduce judgment aren’t we going down a terrible path, asks Dylan Ratigan. If an asset is going to be wroth less isn’t it better to know now?
“Not necessarily,” replies Nesto. He offers this analogy “Assume your neighbor’s house is on the market and no one wants to bid on it. And then the tax man comes along and says no one wants to buy your neighbor’s house so yours is worthless too. That would kind of stink.”
Untangle The Problem
Some people including Jeff Macke would like to see the government untangle these asset backed securities.
But that doesn't seem likely to happen. “I don’t think the government’s role is to untangle them,” responds Rep. Joe Barton (R-TX) on Fast Money. “However I think the government could provide an insurance mechanism by which those people who want to go into the business of doing that can get insurance to do it. That way the government is protecting the market but not making the decision on how to do the untangling.”
A lot of people think mark to market accounting is part of the problem, according to Barton. “So if you change the way you value these assets you might bring stability to the markets.”
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Trader disclosure: On Sept 30, 2008, the following stocks and commodities mentioned or intended to be mentioned on CNBC’s Fast Money were owned by the Fast Money traders; Adami Owns (AGU), (BTU), (C), (GS), (INTC), (MSFT), (NUE); Macke Owns (MSFT), (UUP), (WMT); Finerman's Firm is short (IYR), (IJR), (SPY), (MDY), (IWM); Finerman's Firm is short (BBT); Finerman's Firm Owns (DELL); Finerman Owns (GS); Finerman's Firm Owns (IMCL) Call Spreads; Finerman's Firm Owns (MSFT)
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