Wednesday, September 24, 2008

Counterpoint: Accounting rules are not to blame

The loss in market value of mortgage portfolios is real, not an artifact of accounting rules

There is something seriously wrong with the financial press when an opinion article on the current financial crisis such as the one by William M. Isaac (“How to Really Save the Financial System”, Sept. 20) is given the prominence associated with publication in The Wall Street Journal, and is then reprinted in the Financial Post and endorsed by Terence Corcoran (“Regulatory Train Wreck”).

According to Mr. Isaac, the villain primarily responsible for the current crisis is Fair Value Accounting, the set of regulations adopted by the Securities and Exchange Commission that forces corporations to report their financial holdings in terms of market value on their balance sheets. In this particular instance, the assets in question are mortgages and mortgage-based securities that lost most of their value after the end of the housing bubble, and whose write down devastated the balance sheets of financial institutions like Lehman Brothers that were holding them. Mr. Isaac doesn’t believe that market values reflect the true economic value, which should be estimated from “a discounted cash flow analysis”.

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