Herz Tells FCAG: 'Rethinks' Exit Value in Certain Circ.
In response to a question posed by Harvey Goldschmid, co-chair of the Financial Crisis Advisory Group (FCAG) - a joint advisory group of FASB and the IASB - on whether there is anything left for the FCAG to say on fair value in inactive markets - given FASB's recent guidance (and IASB's potential guidance) in that area - FASB Chairman Robert Herz noted that in light of recent discussions he had in formulating FASB's new guidance, “I have begun to question… to what extent do markets provide a good valuation or not.”
Alluding to the mark-to-market vs. mark-to-model debate, Herz indicated he didn’t think there was a better indication of fair value than market value - if the market value incorporated ‘fundamental factors’ and ‘good information’ - particularly compared to ‘just having one set of managers look at something,’ considering the potential for management bias.
However, he noted, “we have markets that have not only been illiquid, [lacking] proper price discovery and proper clearing mechanisms,” but also, "one has to question whether [market values are] being driven at points in time with other than fundamental factors.” In such circumstances, he added, although "using those, everybody has comparability... whether they have the most relevance - that’s another question." He also noted that while some issues are beyond the FCAG's, FASB or the IASB 's scope, such as actions being taken by regulators with respect to market structure and operation, "I am concerned that non-fundamental factors influence prices."
Herz reiterated this point in the afternoon session, saying, “What we’ve done over the last month or so, [we] talked to lots of people, one of the things we learned among many others, [were] factors that have a real impact on market price, demand, supply, [include] some processes of rating agencies... something rated investment grade [that is downgraded] to noninvestment grade, can all of a sudden take a good chunk of demand out of the market as well.” He added, “A lot of these things led me to rethink some of my basic thinking.” Read more about the FCAG meeting here.