Now you're seeing the true function of the SEC, and the ever vigilant
"FED," and the "Regulators," and the so-called "watchdogs".
Let the extreme book-cooking begin.. in the shadow of the Spitzer
morality diversion. Once again the "regulators" "fail to learn from
the mistakes of history". Little wonder Richard Scrushy was so
convinced that there 8,000 companies with sh-t on their balance
sheets
during the late 1990s and early 2000s. Do you think the evil
terrorists read the Wall Street Journal.
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SEC Aims to Let Firms Explain Crunch Thorns
By DAVID REILLY and KARA SCANNELL
March 14, 2008; Page C1
Just as companies are closing their books on another tumultuous
quarter, regulators are working on a plan that would let them tell
investors that things may not be as lousy as they seem.
The Securities and Exchange Commission is expected to tell public
companies that while they still need to use market prices for many of
the instruments they hold no matter how bad those prices look, they
can also give investors a wider range of the possible values for
those
securities.
The guidance is aimed at giving investors more information about
prices that are difficult to gauge because many markets have seized
up
in recent months. Some observers worry, though, that companies could
use the op****tunity to soften the blow of big losses in markets where
the value of even safe securities have been battered by mortgage
defaults, hedge-fund implosions, worries about inflation and
recession
fears.
Chairman of the House Financial Services Committee Barney Frank, a
Democrat from Massachusetts, says there is an urgent need to look at
mark-to-market accounting because it's having a "downward pull" on
the
economy. Mr. Frank says he is in touch with regulators and will hold
a
hearing when Congress returns from break next month.
The SEC move won't change the actual accounting for instruments
torched by the credit crunch. In many cases, companies will still
have
to use market prices and so record big hits to profit, on instruments
that some executives believe won't ultimately show long-term losses.
But they will allow companies to give a range of alternatives in the
text of their earnings re****ts.
Until now, if a company said a security was worth X when the market
priced it at Y, it risked running afoul of regulators, who could
challenge its method for coming up with that alternative figure.
* What's New: The SEC will give guidance to companies on "mark to
market" accounting for securities, a big issue because of the credit
crunch.
* Investor Impact: Businesses will have the option of giving
investors
a sense of how values can swing -- providing a range of the possible
deviation from the market value that could occur.
* The Fear: Companies could use those ranges to try to guide
investors
away from the harsh reality of the markets, lulling them into
complacency.The SEC plans to tell companies, as soon as next week,
that they can provide ranges for the values that surround those
market
prices. But the agency, whose plans could change, is expected to
suggest that companies explain how they've come up with the values,
especially in cases where there isn't an active market for a security
and, as a result, a model has to be used for pricing.
The risk is that this could also allow companies to present overly
rosy views of the losses they are facing. That could lull investors
and analysts into a false sense of comfort, some fear, much in the
same way overly optimistic assumptions about mortgage defaults
spurred
the current crisis.
"It probably does give business some discretion and wiggle room,"
says
James Cox, a securities-law professor at Duke University. "They're
going to be able to describe a range of possible outcomes without
going to the more-conservative outcome.
"The minute you start introducing ranges and judgments, it's a
fertile
area for op****tunistic behavior," Prof. Cox said. "I'm not against
it,
but we need to understand there will be instances of inappropriate or
fraudulent behavior."
Others argue investors are better off with more information, even if
abuse is possible.
"If management has a heartfelt judgment as to a range of values,
investors might like to hear that," said Michael Young, a partner
with
Willkie Farr & Gallagher LLP who specializes in financial-re****ting
issues. "Can a range be manipulated? Sure. But a range communicates
the imprecision of these numbers, and it's useful for investors to
see
the highly judgmental nature of the process."
The SEC's soft-touch approach -- not backing off the use of market-
value accounting while providing a way for companies to soften the
blow of currently depressed prices -- echoes other recent efforts by
the agency to alleviate market stress. In December, the SEC sent
letters to more than a dozen financial institutions "reminding" them
of their obligation to disclose a host of details about their
exposure
to off-balance-sheet financing vehicles.
In January, the SEC's chief accountant took a more-controversial
step,
saying banks and mortgage companies could modify mortgages without
triggering accounting rules that would put the debt onto the
company's
balance sheet. To address liquidity problems in the market for
auction-
rate securities, the SEC said Wednesday that local governments could
buy their own debt. If governments step in, it can prevent auctions
from failing and triggering high interest rates.
The SEC's effort on mark-to-market disclosures is expected to come in
the form of a letter that will be posted on the agency's Web site. It
is timed to be sent by the end of the first quarter, which is when
all
companies need to comply with market-value measurement rules when
using market prices for financial instruments.
"It would be an appropriate time to remind people of their
obligations
and suggest what they might want to highlight in their re****t," said
John Nester, a spokesman for the SEC.
For instance, the SEC is considering recommending companies explain
how they got the market-value number, disclose the extent to which
that number depends on financial models, and provide the potential
variability of that number, or how firm or sensitive to change it is,
and a reasonable range.
The SEC's guidance is seen as a precursor to a larger debate over how
best to price securities, especially when markets freeze up. That
comes amid a growing outcry among companies, as well as some
regulators and investors, who say the use of such market values is
exacerbating the current financial crisis.
Two weeks ago, during testimony before the Senate banking committee,
Federal Reserve Chairman Ben Bernanke noted his agency's unease over
the use of mark-to-market accounting and said it is "one of the major
problems we have in the current environment." But he added that there
wasn't a clear alternative to the approach.
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