Volume 19, No. 10

 

It's Deja Vu All Over Again: The Fair Value Accounting Wars:  The tune changes, but the song remains the same.  You may have expected that news clip came from last week’s Wall Street Journal - but it dates back to July 16, 1992, when bankers were alleging that valuing securities at fair value would bring about the end of the economy as we know it, because banks would be too scared and too broke to lend.

They’re singing that same song again. This time, the chorus is about the FASB proposal to put all assets and liabilities at fair value as well as simultaneously presenting corresponding amortized cost amounts. The same outcome - “we’ll bring this economy to its knees, when it can least afford it” - is being positioned by the proposal’s opponents. Their rallying cry: “Hell no, we won’t lend!”

Don’t fall for it. Lending is a bankers’ reflex, triggered by the size of an interest rate spread. In this report, we’ll look at the S&P 500 to determine just how “bad” things could be if the proposal is implemented, and take a look at some of the canards floating around regarding the proposal.

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