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Does the SEC Invite Corporations To Lie?

Mike Shedlock, writing at Mish's Global Economic Analysis, questions what the SEC is up to these days regarding how to report asset values previously determined by mark-to-market. (He is commenting an earlier piece in the New York times written by Floyd Norris.)

Both Shedlock and Norris note that the SEC states:

"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."

Mike writes:

"That sounds to me like an invitation to fudge.

Some people on Wall Street think that nearly every sale today is a forced sale.

There are entire categories of collateralized debt obligations where most, if not all, of the trades, occur because a holder has received, or expects, a margin call."

Uh, I see. In a non liquid market, when nobody will buy your counter party positions on a swap because they doubt your credit worthiness, just mark up the assets to what you might have got had nobody questioned your credit reputation.

A lot more zeros in the asset side that way. This is a topic I discussed previously, in Evil Roy Slade Accounting 101.

In one of the best western movies made, Evil Roy Sladehas a philosophical view about accounting which fits our times.

Evil Roy Slade is leader of bank robbing gang - and Evil Roy needs to break up the gang. He goes to the gang's accountant to find out how to split their money.

"But the gang's unfortunate accountant, Randolph (Billy Sands) has problems with Evil Roy quitting.

[There is no money, as Randolph shows Roy in the accounting ledger. But Roy has other ideas.]

Roy: "See that blank space right there? You make a 5, and some zeros, and you make that $50,000. ...So where's the money you got marked down in that book, Randolph?

You owe me $50,000 and you ain't got it?!"

You ain't got it! Why hell, the SEC told you Roy that he ain't got to tell what you do or don't have.

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Full post as published by Misleading Advertising Law on June 23, 2008 (boomark / email).