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Is it fair to blame for financial crisis?

Investor & corporate executives don’t agree on how to value distressed


assets. But maybe they don’t have to.
What the reasons are for melt down of U.S. financial system? Sub-prime
mortgages, credit default swaps, or excessive debt? None the those,
steve forbes , chairmen of the Forbes Media & sometime political
candidate. The main reason for the crisis is “mark-to-market
accounting”(Fair value accounting).
First of all we understand the concept of “mark-to-market accounting”.
Marking to market is the practice of revaluing an asset quarterly
according to the price it would fetch if sold on the open market. Here the
historical cost is outdated for valuing the assets. It is a key component of
what is known as fair value accounting & it is the hottest accounting
debate in decades.
Many bankers make fun of fair value accounting when the sudden seize-
up of credit markets in the fall of 2008 drove the clearing prices for key
assets held by their institutions to unprecedented lows.
This is the obvious reason because if the bank giving loan on the
historical price of the assets but they are ignoring the market value of the
assets. When any person is failing to pay the loan, bank seize the asset &
try to clear the account with the help of selling this asset. If the historical
price is higher than the current market price, bank will get low amount
& making loss in that loan.
In the US, people became insolvent & banks started seize-up their assets.
But the market is frozen, the price of these assets have fallen below the
true value. So the marking-to-market pushed many banks toward
insolvency & forced them to unload assets at low price, which then
caused values to fall even further.
Yet mark-to-market accounting continues to have its proponents, who
are equally adamant. Lisa Koonce ,an accounting professor wrote that
“this is simply a case of blaming the messenger. Fair value accounting is
not the cause of the current crisis. The reasons for it are such bad
decisions as granting subprime loans & writing credit default swaps…”
The investment advisory group of the Financial Accounting Standards
Board (FASB) stressed that it is especially critical that fair value
information be available to capital providers & other users of financial
statements in periods of market turmoil accompanied by liquidity
crunches. This view suggests that banks should mark their bonds to the
current market price, so the investors would become certain & not
having trouble to recapitalized these institutions.
Which camp has the right answer? Perhaps neither. We don’t want
banks to become insolvent only because of short-term declines in the
prices of the mortgage-related securities. Nor do want to hide bank
losses from investors & delay the clean-up of toxic assets as happened in
Japan in the decades after 1990. We only want the some new
multidimensional approaches which regulate both bankers & investors to
financial reporting.
(Next article: myths of the game by mehul sangani )

Mehul Sangani
(MBA 3rd sem)