Volume 21, No. 6

Fair Value Reporting: A 4Q2011 Financial Institutions Survey:  The quarterly disclosure about the fair values of financial instruments have been available for investors’ use for several years. When observed in the aggregate, they provide a market opinion on the realizability of assets in financial institutions - and a market opinion on the likelihood that those financial institutions will meet their debt repayment obligations. The verdict at the end of 2011: better assets and mostly better creditworthiness than one year ago - a confirmation of the general belief that the financial system continues to heal from the wounds of the financial crisis.

Investors haven’t yet made the fair value information one of their "must-read" disclosures. Ask them why, and you’ll hear concerns about the over-reported "own credit gains"that taint earnings reports - which aren’t even really related to the disclosures, but are associated with them nonetheless. You’ll also hear that they think the information is unreliable or too hypothetical. Maybe that’s what they believe - but many of them will perform their own "sum of the parts" valuations for a company, substituting highly subjective information for reported balances. Nothing wrong with that - it’s a mainstay analysis of many value-style investors. Yet it’s no different than the simple balance sheet substitution of the disclosed fair values, and using the results to test one’s beliefs about the financial condition of a particular company. Looking at the fair value information in broader terms tells more of a story than just which companies show "earnings from rotting credit."

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