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SEC On Track To Adopt IVS: By-passing FASB, BIS, Congress And The Treasury?

Politics / Market Regulation Aug 21, 2009 - 12:23 AM GMT

By: Andrew_Butter

Politics

Tyler Durden can always be counted on to be first off the block with a juicy bit of news, so it was no surprise that he broke the story about SEC's recent effort to re-start the job that they apparently abandoned some-time in mid 2000, namely protecting investors who put their money into entities they regulate from fraud (http://seekingalpha.com/article/157053-sec-to-demand-loan-loss-clarity-in-md-a-disclosure).


But the quip "the SEC is now officially an accountant", missed the point completely.

What the SEC is clearly concerned about is the likely level of failure of loans (in the future), and the likely decline in Collateral Value underlying those loans (in the future).

That's not accountancy, that's valuation. I though everyone had realized by now that accountants (and ratings agencies for that matter), don't know anything about valuation (http://www.marketoracle.co.uk/Article8177.html), otherwise they would not have signed off the TBTF banks, plus Fannie and Freddie plus AIG as "going concerns" weeks before they collapsed. Valuation is about err...not doing that, which is something else completely.

Accountants get around their "blind spot" by going with either "book" (that's the best), or mark-to-market" (which is just a modified form of book that takes you up to yesterday), or of course the latest idea of FASB, "mark-to-fantasy", which is a system where a computer is employed to generate numbers at random and you pick the one you like.

Ah but one dreams of hiring an accountant with a "blind spot" - the bigger the better, that's what the words Big 4 are all about!

Tyler correctly points out that this might rather scuttle the cunning gambit of Congress to force FASB to allow "mark-to-fantasy" to be reported, plus the carefully designed un-stressful stress tests delivered with such "zeal" by the Treasury.

But that's beside the point, the interesting thing is that the wording and the intent of the letter might easily have been lifted from International Valuation Standards Application 2: Valuation for Secured Lending Purposes.

That's of course apart from the fact that they missed out some rather important points which are what makes IVS work (every time), and what makes Voodoo Valuation Standards fail (not all the time (thankfully), just sometimes). In particular, the distinction between Market Value and Other Than Market Value.

But no matter, it is a very positive step that they are finally "seeing the light" and somehow getting the point that if investors think they are likely to be fed a load of toxic rubbish instead of properly reported valuations, they tend to be a bit reluctant to invest.

Although one can't help but wondering though, why they persist in trying to re-invent the wheel, when clearly they don't really know what they are doing. Why not instead simply stipulate "all valuations of assets held by entities regulated by the SEC, should be done strictly according to International Valuation Standards"?

That would be much simpler, just write one line then go back to sleep. If they had done that in 2000 when IVS was first published, well they might not have been embarrassed by being rudely awoken from their extended snooze (and there wouldn't have been a credit crunch).

The danger of course is that without the “whole of IVS” being in place, and instead having a rather crude approximation, as HunterGLV pointed out the TBTF banks will just get a waiver and 3,000 smaller banks will fail (http://seekingalpha.com/user/442687/comments).

One of these days they will get it right, I suppose.

By Andrew Butter

Andrew Butter is managing partner of ABMC, an investment advisory firm, based in Dubai ( hbutter@eim.ae ), that he setup in 1999, and is has been involved advising on large scale real estate investments, mainly in Dubai.

© 2009 Copyright Andrew Butter- All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

Andrew Butter Archive

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