Fair Value Accounting, Liquidity, and Treasury's $700 Billion Bailout

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By Edith Orenstein, FEI Financial Reporting Blog - The use of fair value or mark to market accounting has already come up in opening statements of Members of the Senate Banking Committee at its hearing taking place right now on Turmoil in the U.S. Credit Markets. In related news, the American Bankers Association and Financial Services Roundtable are reportedly trying to get relief from fair value or ‘mark to market’ accounting requirements written into Treasury’s $700 billion bailout bill, or alternatively to have the SEC provide this relief outside the bill.

The concern with fair value accounting relates to FAS 157 (and its sister standard internationally, IAS 39) which at their core include an explicit presumption that actual transaction values are the best measure of fair value measure when there are active markets and sales are not ‘forced’ or ‘distressed.’

There are at least two sides to the fair value (also called mark-to-market) argument: those that say fair value accounting has provided a dose of reality and transparency on what some in the press are referring to as ‘toxic’ debt, including certain subprime mortgages, mortgage backed securities and credit default swaps, and those who say that fair value accounting as currently constructed under FAS 157, IAS 39, and various interpretations or related guidance thereof has exacerbated the crisis.

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