Comments on: A Comment on SFAS 159 http://alephblog.com/2008/06/03/a-comment-on-sfas-159/ Helping Institutions and Ordinary People Invest Better by Focusing on Risk Control Sun, 12 Feb 2012 18:05:33 +0000 hourly 1 http://wordpress.org/?v=3.3.1 By: Kurbanhttp://alephblog.com/2008/06/03/a-comment-on-sfas-159/comment-page-1/#comment-20385 Kurban Sat, 13 Dec 2008 18:53:44 +0000 http://alephblog.com/?p=724#comment-20385 Do you think the global financial crisis has not yet reached its bottom? Is now goes rasprostrannenoe view to invest in precious metals? I am very important to know your opinion. Thank you. Do you think the global financial crisis has not yet reached its bottom? Is now goes rasprostrannenoe view to invest in precious metals? I am very important to know your opinion. Thank you.

]]> By: David Merkelhttp://alephblog.com/2008/06/03/a-comment-on-sfas-159/comment-page-1/#comment-17711 David Merkel Wed, 04 Jun 2008 13:58:23 +0000 http://alephblog.com/?p=724#comment-17711 James, you are right, FAS 159 is optional, it is just that almost of the major players on Wall Street opted to adopt it. I think that it was in their interest to do so, and besides, whether right or wrong, FASB has been pushing for "fair value" accounting. If convergence with IFRS does not happen, FASB will make something like FAS 159 mandatory, in my opinion. James, you are right, FAS 159 is optional, it is just that almost of the major players on Wall Street opted to adopt it. I think that it was in their interest to do so, and besides, whether right or wrong, FASB has been pushing for “fair value” accounting. If convergence with IFRS does not happen, FASB will make something like FAS 159 mandatory, in my opinion.

]]> By: Jameshttp://alephblog.com/2008/06/03/a-comment-on-sfas-159/comment-page-1/#comment-17709 James Wed, 04 Jun 2008 08:19:09 +0000 http://alephblog.com/?p=724#comment-17709 On #1...FAS159 does not require companies to mark their debt. It gives them an option, for better or for worse. (The standard is actually titled, the Fair Value Option). They didn't have to mark anything. In fact, they can selectively choose which items to mark (and they would be level 2, unless they are exchange traded). The purpose of this is to lock in hedged transactions... buy debt at a price and issue a bond... in a one for one transaction, carrying both at fv better reflects the economics of the position. Especially from an interest rate perspective - before the fv option, an increase in interest rates would kill a fixed rate asset but the debt would be left unchanged (amortized basis). So an artificial loss is generated, even though a spread is locked in at inception. The value of the trade is whether the spread difference adequately covers the credit risk... which is reflected in the net P/L of the two instruments. As credit risk changes, so does profitability of the trade. I do agree that on long-term general corp obligations, if a company where to elect the FV option (not sure why they would), it would be somewhat misleading in the short term. Charles - an attribution of the change in the balance sheet = the cash flow statement. On #1…FAS159 does not require companies to mark their debt. It gives them an option, for better or for worse. (The standard is actually titled, the Fair Value Option). They didn’t have to mark anything. In fact, they can selectively choose which items to mark (and they would be level 2, unless they are exchange traded). The purpose of this is to lock in hedged transactions… buy debt at a price and issue a bond… in a one for one transaction, carrying both at fv better reflects the economics of the position. Especially from an interest rate perspective – before the fv option, an increase in interest rates would kill a fixed rate asset but the debt would be left unchanged (amortized basis). So an artificial loss is generated, even though a spread is locked in at inception. The value of the trade is whether the spread difference adequately covers the credit risk… which is reflected in the net P/L of the two instruments.
As credit risk changes, so does profitability of the trade.

I do agree that on long-term general corp obligations, if a company where to elect the FV option (not sure why they would), it would be somewhat misleading in the short term.

Charles – an attribution of the change in the balance sheet = the cash flow statement.

]]> By: Charleshttp://alephblog.com/2008/06/03/a-comment-on-sfas-159/comment-page-1/#comment-17704 Charles Tue, 03 Jun 2008 10:58:46 +0000 http://alephblog.com/?p=724#comment-17704 It is also worth considering how FAS159 would have behaved pre-crisis when credit spreads were getting tighter and tighter for many years. In this environment, the companies own debt would be increasing in value along with the assets; but the assets would be increasing much faster. The liability revaluation dampens the otherwise excessive volatility of the firm's net worth. It acts as a brake in both directions. I see this as a better framework than any other. The real challenge is the stupidity of the income statement. It should really just be an attribution of the change in the balance sheet. The core or recurring earnings part should strip out the excess mark-to-market of both the assets and liabilities and attempt to measure that part of the change in net worth attributable to long term changes in expected cash flows and new business. It is also worth considering how FAS159 would have behaved pre-crisis when credit spreads were getting tighter and tighter for many years. In this environment, the companies own debt would be increasing in value along with the assets; but the assets would be increasing much faster. The liability revaluation dampens the otherwise excessive volatility of the firm’s net worth. It acts as a brake in both directions. I see this as a better framework than any other. The real challenge is the stupidity of the income statement. It should really just be an attribution of the change in the balance sheet. The core or recurring earnings part should strip out the excess mark-to-market of both the assets and liabilities and attempt to measure that part of the change in net worth attributable to long term changes in expected cash flows and new business.

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