“When an active market for a security does not exist, the use of management estimates that incorporate current market participant expectations of future cash flows, and include appropriate risk premiums, is acceptable.”
So what does this mean? Previously, a firm was forced to value an asset based on what that asset would currently sell for. This can create problems on a firm’s financial statements by making the firm appear more or less valuable than it really is.
The first situation is best illustrated by the example of Enron. Using mark to market accounting, Enron recognized revenues that would not actually be realized for several years, making the company’s assets appear much greater than they actually were. Warren Buffet referred to this kind of abuse of the mark to market concept as “mark to myth,” deliberately inflating the earnings of a company based on highly speculative future values of current assets.
The second situation is one currently being experienced by banks and other mortgage lenders throughout the United States: because no one is willing to buy mortgages and mortgage-backed securities, their values are basically zero, even if based on a loan that is in good shape and currently generating revenue. For example, if a family has a $300,000 loan for their home, both parents work and make their mortgage payments on time every month, the loan is still counted as worthless under mark to market even though the bank who issued the loan is earning interest income. This significantly reduces the net worth of the bank and has contributed to bank failures in the last few months.
The statement from the SEC and FASB above is meant to alleviate the second situation. It allows mortgage loans and mortgage-backed securities to be valued based on the income currently being generated, taking into account the time value of money. It helps keep banks from failing, and it doesn’t take $700 billion dollars to do it.
Drawn for Project Rooftop’s ReVamp contest. Didn’t win or get honorable mention, but I thought I’d post it here anyway. 0.5mm mechanical pencil, 0.05mm-0.7mm Staedtler pigment liners and Adobe Photoshop.
My last post made me want to go find The Lord of the Rings teaser I mentioned. How much more amazing would this teaser have been if you were sitting in a theater with absolutely no idea that the movies were being filmed, and suddenly this came on the screen?
Some time before I saw The Sixth Sense, a friend’s girlfriend was telling me how much I needed to see it and how the movie had a “twist ending,” to which I immediately replied “so Bruce Willis is dead?” She tried to deny the statement, but I knew. She’d ruined it for me. What other twist ending could someone put into a movie about a kid who sees dead people?
Last night, my wife and I finally watched Indiana Jones and the Kingdom of the Crystal Skull. For months, Frank Marshall and others on the production denied that Shia LeBeouf’s character Mutt Williams was the son of Indiana Jones. Less than halfway through the movie, he is revealed as exactly that.
Just a few days ago, Senator Joe Biden claimed that he was “not the guy” when asked about the possibility of being Barack Obama’s running mate.
I have some important news that I want to make official.
I’ve chosen Joe Biden to be my running mate.
Joe and I will appear for the first time as running mates this afternoon in Springfield, Illinois — the same place this campaign began more than 19 months ago.
I think there is a belief that keeping a secret for as long as possible gives it more impact when the secret is finally revealed, and in some cases that can definitely be true. Continuing the movie comparisons, I really wish the first knowledge I’d had of The Lord of the Rings films had been the trailer with the ring spinning through the air interspersed with the famous “One ring to rule them all…” line rather than knowing about the filming years ahead of time. That said, when someone’s on to your secret, fess up. Lying to me doesn’t fool me — it just makes me trust you less.
Remember, I am not a licensed financial adviser and cannot give financial advice. Before investing in any securities, you should consult a licensed representative.
Something that has really impressed me at work is how many of my employer’s clients have contacted him during the recent economic downturn not to panic or pull money out of the market, but to simply reevaluate their asset allocation and even to put more money into their accounts to take advantage of investing while the market is low. He’s taught them well. They’re doing exactly what firms like the American Funds suggest they should do, and fulfilling the role of a financial adviser.
