Tuesday, July 01, 2008

When In Doubt, Blame the Accountants

by Tanta on 7/01/2008 10:02:00 AM

New-Old meme: FAS 157 is ruining the financial industry. Barry Ritholtz knocks this point of view around, as reported in the New York Times:

Some blame the rapacious lenders. Others point to the deadbeat borrowers. But Stephen A. Schwarzman sees another set of culprits behind all the pain in the financial industry: the accountants.
You see, the magic of securitization during the boom was that it created obscure instruments like CDOs that were "worth" more than the underlying collateral (absurd mortgage loans). Now that the magic of securitization during the bust is that it has left behind obscure instruments--those pesky CDOs--that may well be "worth" less than the underlying collateral, if you can imagine that, foul is cried:
Of course, the purpose of FAS 157 was to make the market more transparent and efficient, which Mr. Schwarzman doesn’t take issue with.

“The concept of fair value accounting is correct and useful, but the application during periods of crisis is problematic,” he said. “It’s another one of those unintended consequences of making a rule that’s supposed to be good that turns out the other way.”
In other words, mark-to-market is great on the way up, but it's not fair to have to mark on the way down.