SEC makes a smart move

I am feeling a little more comfortable about the state of the economy today. Yesterday the SEC modified guidance on the rule that was artificially valuing mortgages at zero worth.

WASHINGTON, Sept 30 (Reuters) - U.S. securities regulators on Tuesday gave the financial industry a reprieve from marking hard-to-value assets down to fire sale prices, throwing a lifeline to an industry beset by strained credit markets and the latest round of bank failures.

...

In the new guidance, first reported by Reuters, the U.S. Securities and Exchange Commission reminded financial services firms that they don't need to use fire sale prices when evaluating their hard to price assets.
"This is a significant first step and adds stability, confidence, and liquidity within the capital markets," said Steve Bartlett, president and chief executive of The Financial Services Roundtable. "By clarifying how to treat assets in an uncertain market, the SEC is continuing to provide transparency to investors and helping institutions to provide credit in periods of market stress."

...

as credit markets seized up this year, many banks were forced to rely on models to value complex mortgage securities that used to trade in more active markets. Critics have complained that accountants forced banks to base their values on fire sale prices in illiquid markets instead of the so-called level 3 input, or unobservable factors, such as the mathematical models used to evaluate their securities.
The SEC's guidance says that sometimes the level 3 inputs may be more appropriate than the so-called level 2, or observable factors.
"In essence, the SEC wants to stop the avalanche of declining prices," said Tom Sowanick, chief investment officer at Clearbrook Financial. Sowanick said that the new guidance should allow banks to rely more on their own assumptions when they determine fair value rather than the distressed sale prices occurring in the markets.

source

The McCain campaign is already on this -

ARLINGTON, VA -- Today, Doug Holtz-Eakin, McCain-Palin 2008 Senior Policy Adviser, issued the following statement on the SEC's plan to relax mark-to-market accounting requirements:

"John McCain is pleased to see that the SEC has finally decided to permit alternative accounting methods to mark-to-market accounting for securities where no active market exists. There is serious concern that these accounting rules are worsening the credit crunch, making it difficult for small businesses to stay afloat and squeezing family budgets. In March, John McCain called for a meeting of accounting professionals to discuss whether mark-to-market accounting was magnifying problems in the financial markets."

Background:

In March, John McCain Called For A Meeting Of Accounting Professionals To Analyze The Current Mark To Market Accounting Systems. "[I]t is time to convene a meeting of the nation's accounting professionals to discuss the current mark to market accounting systems. We are witnessing an unprecedented situation as banks and investors try to determine the appropriate value of the assets they are holding and there is widespread concern that this approach is exacerbating the credit crunch." (John McCain, Remarks, Santa Ana, CA, 3/25/08)

source

This is a good first move in my non-accountant / non-economist opinion, however the SEC and the FASB are resisting a total suspension of the rule.

Other, smarter people disagree with me. The Chairman of the Fed is one:

Federal Reserve Chairman Ben S. Bernanke and other proponents say removing the rule would erode confidence that firms are owning up to losses.

source

And honestly I see his point, but there should be a happy medium that addresses issues like the Mortgage Backed Securities, maybe a time based depreciation when there is an illiquid market so all the losses don't occur in one quarter. I don't know if that would make things better or worse, it's just an idea that flew threw my head. I do know that while it probably doesn't go as far as they would like the American bankers Association is happy with yesterday's clarified guidance:

The American Bankers Association, a trade group representing lenders that has lobbied the SEC over fair-value accounting, praised the agency's clarifications, saying they will ``help auditors more accurately price assets,'' according to a statement released today.

Now if the bailout plan passes we should be well on our way to stemming the economic blood flow.

BTW - George Soros is floating a plan that in my opinion is much worse than this bailout package.

Specifically, the liberal philanthropist has proposed that government funds should be used to recapitalize the American banking system by purchasing equity in banks and investment firms.

Democratic Rep. Jim Moran (Va.) scheduled a meeting Tuesday afternoon with Robert Johnson, a former manager of the Soros Fund Management, to discuss the proposal.

Moran compared the proposal to Warren Buffet’s $5 billion investment in the investment firm Goldman Sachs Group in return for preferred stock and warrants to buy common stock at a discount.

...

Robert Shapiro, chairman of Sonecon, an economic advisory firm, who served as Commerce Department undersecretary during the Clinton administration, raised questions about Soros’s proposal.

He said that if the government bought stock in troubled firms, a problem would arise regarding how Uncle Sam would be represented as a shareholder.

“How does the government vote the shares?” he asked. “It puts them in a potential conflict of interest. Regulatory interests may hurt the bottom line.”