the non-cash writedowns that financial firms are posting have begun to spur a backlash among some investors and executives, who are blaming accounting rules for exaggerating the losses and are seeking new, more reasonable ways to value investments, most, if not all, are not held for sale.
these rules, as an overreaction to the enron abuses, require companies to value many of the securities they hold at whatever price prevails in the market, no matter how sharply those prices swing.
this can, as is happening right now, obviously trigger a domino effect; the market falls, forcing banks to take write-offs, pushing the market lower, causing more write-offs. it's really quite ridiculous.
the rules' supporters, however, make a stark counter-argument: they can help prevent the us from suffering the kind of malaise that gripped japan in the 1990s: as banks sat on mountains of dud loans for years without writing them down.
but enough is enough! there has to be some decent middle ground here to prevent another enron (which of course is impossible), and in preventing a japan-style morass (which again is really impossible - every conceivable angle simply cannot be covered in the real world).
friday's day in the toilet illustrated the fear, desperation and even disgust over this whole issue: aig's losses, that report by ubs saying losses among financial institutions could top $600 billion as the turmoil in global credit markets continues to unfold. this is becoming a self-fulfilling prophecy! it simply does not need to unfold this way.
of course no one knows with certainty (what's certain, anyway?) what would be a better approach than using market prices for valuing holdings like these. probably some sort of blended system using market prices some places and historical prices in others. obviously the accountants need to make the best judgement they can, with probably some sort of close oversight as to try to prevent as many abuses as possible. yeah, it won't always be easy.
even some market bears out there actually doubt that firms like aig will suffer the full force of the losses they are now booking. instead, these investors argue that the market has overreacted and will recover once the current panic subsides.
indeed, my opinion is that i don't expect the losses to be permanent. we're living in a time of panic, and panic NEVER is the right course for anything. the tumult is even spreading in the normally very boring market for municipal bonds -- debt issued by states and municipalities -- which is suffering one of its biggest crises in its history.
now it is being disclosed that hedge funds are being hit with big losses after betting wrong on the direction of muni-bond prices, and as traders rushed to sell and exit their positions, portions of the market effectively froze. on friday, muni-bond-prices fell for a 13th straight day, pushing yields significantly higher.
getting back to aig - its is that its write-downs were "unrealized" -- in other words, they may never actually result in a true charge to the company -- echoes points made by a number of other major financial firms. it's a delicate point because companies feel they are being forced to take big financial hits on holdings that they have no intention of actually selling at current prices.
that's right - they have no intention of selling these securities at these current prices! but yet, they are being forced to book what amounts to phantom losses, unrealized losses, right now. there has to be a better way than this. the firms argue they are strong enough to simply keep the holdings in their portfolios until the crisis passes. forcing companies to value securities based on what they would fetch if sold today is simply an attempt to apply liquidation accounting to a going concern - how can that be the right course of action?
it's my opinion that these mark-to-market accounting rules are exaggerating any losses, leading to unnecessary market turmoil, leading to unnecessary and excessive writedowns. i believe that current prices for many of these securities have disconnected from their ultimate value (in most situations - obviously i think the current situation is an abnormal one).
as reported in the journal, even analysts who are generally supportive of the market-value approach acknowledge it can make things tougher for investors in the current environment. it makes comparisons from quarter to quarter difficult, if not impossible.
i don't think america is like japan at all. in alot of ways, we're like vegas - build something; and if we don't like it, or it doesn't work; or it becomes out-dated, then knock it down and start over. that's why i think the people that are saying it could become another japan - style situation where things are hidden for years are not correct. our country loves to have the bad deed exposed, and then be able to forgive those that did it.
america will of course ride this out. under our current accounting rules, however, sometimes market crises force companies' hands. that's what we're seeing now with all these (in my opinion) unnecessary writedowns and "losses." there's alot of money to be made over the next several years in financials for those with patience and a bit of an iron will.