AIG (NYSE: AIG) is asking regulators to change the way that assets are marked to market at financial companies. This system has caused tens of billions of dollars to be written off by banks, insurance firms, and brokerages. According to the FT "Under AIG’s proposal, which has been presented to regulators and policymakers, companies and their auditors would estimate the maximum losses they were likely to incur over time and only recognise these in their profits."
In other words, securities that a financial company does not plan to sell would not be written down. The problem with this is that the company might change its mind or run into trouble and have to off-load some of the paper.
The SEC appears to be ready to take the matter a step further. It is proposing to allow financial firms the capacity to show a "range" of value for these impaired assets and give a written explanation of how they came to their numbers. According to The Wall Street Journal ""The SEC plans to tell companies, as soon as next week, that they can provide ranges for the values that surround those market prices.
The proposal is remarkably bad. While companies will not game the system, they may want to state their best case. And who wouldn’t?
One of the troubles with the program is that investors would be looking at P&L statements which were governed by one set of rules in 2007 compared with numbers which are set up under different regulations in 2008. How does any investor reconcile that?
The reasonable solution to the problem is to turn it over to the accounting profession and allow auditors to make judgments on the values of portfolios. The accounting profession was pressed into service when public companies had to make sure that they were in compliance with Sarbanes Oxley. The system worked well. The investors and SEC could be assured that public companies had done the job right.
Letting financial firms look at a "range" of values is lame-brained. One bank, say Citigroup (NYSE:C) may take one approach to its valuations while a competitor like JP Morgan (NYSE:JPM) might decide to do its with a slightly different approach.
Let the audit profession set out a consistent set of rules and enforce them evenly across they system.
Douglas A. McIntyre