SEC: It's OK To Lie About The Value Of Your Assets If They Don't Trade Much

The SEC has updated its guidance on “fair value accounting,” which is the technique that banks use to say that their assets are worth more than they’re actually worth. This clarification will come in handy now that banks’ assets are worth so little that no one will buy them at a price banks are willing to accept.

Basically, the rule is that, if there’s no “active market” for the asset, you can value it using estimated cash flows, discount rates, present value, etc. And as anyone who has ever valued an asset that way can tell you, that means you can say it’s worth pretty much anything you want.

And what’s an “active market”? Well, that’s in the eye of the beholder, too. Floyd Norris explains...

And here’s the punch line:

A few years from now, long after some bank has failed, there will probably be an S.E.C. enforcement action claiming that fraud was committed when a bank ignored market prices in valuing assets, and the defence will be that the bank used the judgment required by this statement to exclude all the sales that indicated it was overvaluing assets.

If such a case goes to trial, we might find out that the bank was quite happy to rely on prices in inactive markets when the price was rising, but concluded the market was not worthy of attention when the price began to fall.

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