Events leading to loosening of Mark-to-Market Accounting

Loosening of Mark-to-Market Accounting maybe a watershed event on this financial crisis.

Its main events:

A) FAS 157 Fair Value Measurement
detailed document

FAS 157 took effect after November 15, 2007.
The fair value is "price that would be received to sell the asset or paid to transfer the liability (an exit price), not the price that would be paid to acquire the asset or received to assume the liability (an entry price)".
This is "mark-to-market" accounting.

B) Emergency Economic Stabilization Act of 2008 (EESA)
(we can find detailed EESA from my previous post.)

EESA opens FAS 157 for review through Section 132 and 133.

"Section 132: Authority to suspend mark-to-market accounting"
restates SEC authority to suspend FAS 157

Section 133: Study on Mark-to-Market Accounting
SEC to consult with Fed and Treasury to conduct a study of effects of FAS 157.

C) Study and decision on Section 132, 133
Date: 30 Dec 2008

Outcome: decided to improve, not to suspend mark-to-market accounting
press release

SEC study on mark-to-market accounting
(Note: This long study is a very good read on this subject matter.)

D) A Bloomberg article on FASB Chairman was under pressure by US Chamber of Commerce, American Bankers Association and companies to loosen Mark-to-Market ruling on impaired investment: Bloomberg article

E) FASB Issues Proposals to Improve Guidance on Fair Value Measurements and Impairments
(gave in to the pressure)
Date: 17 Mar 2009
proposals

F) US’s Financial Accounting Standards Board (FASB) decision on "mark-to-market" accounting rules
Date: 2 Apr 2009
Decision

FSP FAS 157-e, Determining Whether a Market Is Not Active and a Transaction Is Not Distressed
Outcome: easing of mark-to-market accounting
Some highlights:

• applied prospectively and that retrospective application would not be permitted
• When: would be effective for interim and annual periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009.

It left to be seen:
1. In the coming reporting season, how much will it "beautify" financial institutions' balance sheets ?

2. What will be the reactions of investors on "improvement" of the financial institutions’ results ? How to judge the actual financial health of the financial institutions ? Or just take the "improved result" as the "actual result" ?

US Economic Indicators

We can get US Economic Indicators from this website.
Its data sources are US Census Bureau and Bureau of Economic Analysis (BEA).

We can find out what are the economic indicators, source, frequency and date of release.

I try out its email updates. When there are updates, an email will be sent to my Inbox directly.

In case we want to check for data when it’s released, refer to "US Economic Indicators – calendar for 2009". This PDF file shows date and time release of particular economic indicator.

We can also go directly to US Census Bureau and Bureau of Economic Analysis (BEA) to access the data.

What are the significances of these economic indicators ?
I find this book " The Atlas of Economic Indicator – a visual guide to market forces and the Federal Reserve" useful and simple to refer to.

However, do bear in mind that there is a lag between the date data is released and period it is used to measure. This in a way limits its usefulness.

Obama's remarks on American Automotive Industry

US President Barack Obama has issued "Remarks by the President on the American Automotive Industry" on 30 Mar 09. Some PDF files on Warrantee Commitment Program; GM and Chrysler’s Viability Assessment are included in the website too.

The Auto Plan

For any investor, a lot can be learnt from GM and Chrysler’s Viability Assessment. It is like a mix of industry analysis + company analysis.

Some highlights of the Auto Plan that I find interesting: (refer to the website for actual text and details)
1. Has shed over 400,000 auto-related jobs over the past years.

2. It’s not the fault of workers. It’s a failure of leadership – from Washington to Detroit.

3. Plans required hard choices by companies and stakeholders.

4. General Motors (GM) - Rick Wagoner is stepping aside as Chairman and CEO;
adequate working capital over the next 60 days; to produce a better business plan;
United States government has no interest in running GM.

5. Chrysler – potential partner Fiat to transfer its cutting-edge technology; building new fuel-efficient cars and engines; agreement that will ensure that Chrysler repays taxpayers for any new investments that are made before Fiat is allowed to take a majority ownership stake in Chrysler; give Chrysler and Fiat 30 days to reach final agreement, consider lending up to $6 billion

6. Bankruptcy code as a mechanism to help GM & Chrysler restructure quickly.

7. Warrantee of car from Chrysler, GM will be safe: the Warrantee Commitment Program

8. To support demand:

• Recovery Act funds to purchase government cars + other federal fleet purchases.
• Treasury Department's Consumer and Business Lending Initiative + auto finance companies: to increase flow of credits.
• New tax benefit for auto purchases.
• Fleet modernization programs: credit to consumers, turn in less fuel-efficient/old cars and purchase clean cars.

9. New Director of Recovery for Auto Communities and Workers to assist the workers, communities, and regions.

Will the Auto Plan be able to revitalise the US automotive industry ?

COP’s Hearing: “Learning from the Past--Lessons from the Banking Crisis of the 20th Century”

A lot can be learnt from past banking crisis and their solutions.

US’s Congressional Oversight Panel has lined up few experts for testimonies about banking crisis and their solutions.
Experts' views on past banking crisis and lesson learnt

The testimonies by these experts are compiled in the website above.

We can learn a lot about banking crisis listed below, solutions used then and insights gain:
1. Great Depression in 1930s;
2. Savings and Loan collapse in the 1980s: the solution then was Resolution Trust Corporation (RTC);
3. Banking Crisis in Japan in early 1990s;
4. Banking Crisis in Sweden in early 1990s (This solution is what they called "Nordic Capitalism – the future of capitalism"). Refer to my previous related post.

What will US (and the world) use as a solution to current financial crisis ?


My other related posts on:
Europe investment, financial crisis, US investment.