Tuesday, March 31, 2009

My Torrid Affair with Annette Bening

Today is Tuesday, 31 March 2009.

Mark-to-market accounting means that an asset must be carried on a company’s books at the price for which it would currently sell.

In many cases, this price is easy to determine. For example, shares of IBM are bought and sold every day the New York Stock Exchange is trading. One need only ascertain the closing price on a specified day, multiply by the number of shares held, and voila!

Determination of value becomes difficult if the asset is illiquid, that is, seldom is bought and sold. In the case of certain financial products, for example, only a small number of units may exist, and may change hands very infrequently. The difficulty is compounded if the market for the particular asset, or markets in general, are suffering serious distortions. In a panic, for example, shares in a company whose book value (the net value remaining if all assets of the company were liquidated and all debts paid) is $100 per share may be selling for only $75. One may argue then that the “market”, in which the “invisible hand” (cf. Adam Smith) should always correctly determine valuation, is temporarily deranged.

Should one then ignore the current market price, and rely instead on mark-to-model accounting?

Mark-to-model accounting makes use of a mathematical model (always either developed by or developed for the company valuing itself) to determine what the value of the asset should be, were the “market” in its right mind. This accounting approach is naturally favoured by companies whose assets have taken a hit.

In the instant case, financial industry companies argue they are being unfairly harmed by the rules that force them to use mark-to-market accounting, and have fiercely lobbied and pressured the Federal executive and legislative branches to force the Financial Accounting Standards Board to allow them to use mark-to-model accounting during the current economic unpleasantness. A vote in the FASB is scheduled for 2 April.

Mark-to-model accounting is, of course, in its essence, intimately prey to corruption and manipulation. One might name it “Oz Accounting”: If only … I had a brain, a heart, the noive … and, at some possible future point in time, the right market.

The Museum of the Bourgeois floats a solution. Allow companies to present two valuations, one labeled “real” and one labeled “imaginary”. Accompanying the latter would be a mandated and strictly regulated statement explaining the nature of the model, how it diverges from current reality, how fantasy and reality might converge, etc.

As to my torrid affair with Annette Bening. While it has not yet been technically consummated under current market conditions, proprietary relationship models demonstrate it’s a sure thing.

Eat your heart out, Warren.


Anonymous princess and cpa said...

Such a wide breadth of knowledge you have. Your mama didn’t raise no dummy. I agree that “alternative” valuations should be presented in financial statements. Such a democratic approach – choose which one you prefer.

As to your torrid affair – ditto for me and George Clooney. I know it would be a sure thing because I firmly believe I would have the same affect on George that Annette had on Warren, i.e. recognition that she saw through his bullshit and liked her no-nonsense style. (Thank you for indulging my personal interjection.)

10:57 AM  
Blogger HH said...

While I doubt George is good enough for you, if you wish to toy with his emotions ... go for it!

3:29 PM  

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