Bob Herz, the Chairman of the FASB, gave an excellent speech last week. You can read it at the following link: http://www.fasb.org/news/09-18-08_herz_speech.pdf Also, the SEC has provided some additional guidance at: http://www.sec.gov/news/press/2008/2008-234.htm
A fair value measurement is meant to be what an asset/liability would sell for between willing and knowledgeable market participants. Fire sale prices are not indicative of fair value nor does the fact that you had to sell some assets at fire sale prices mean that all your other assets need to be marked down. In the financial markets, an active market for mortgage securities has disappeared. There are no willing participants and nobody has any knowledge about what these instruments are worth. Therefore, market prices should not be used to fair value these securities because they are not indicative of the securities real value.
When a active market does not exist, other valuation techniques should be used.
Paragraph 19 of FAS 157 states: "Valuation techniques that are appropriate in the circumstances and for which sufficient data are available shall be used to measure fair value. In some cases, a single valuation technique will be appropriate (for example, when valuing an asset or liability using quoted prices in an active market for identical assets or liabilities). In other cases, multiple valuation techniques will be appropriate (for example, as might be the case when valuing a reporting unit). If multiple valuation techniques are used to measure fair value, the results (respective indications of fair value) shall be evaluated and weighted, as appropriate, considering the reasonableness of the range indicated by those results. A fair value measurement is the point within that range that is most representative of fair value in the circumstances."
As stated in the SEC guidance, in the absence of an active market for the mortgage securites, a discounted cash flow method may be a more appropriate measure of fair value.
There isn't anything wrong with fair value accounting. It did its job in disclosing to investors that certain investments were a lot riskier than orginally thought. Proper application of the FAS 157 rules is necessary to fairly value the mortgage backed securites and to put some realism back in the market.
Just my opinion. Please leave your opinion and maybe together we can figure this mess out.