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Regulators Deem Price An Inconvenient Truth


New SEC rules promote fuzzy math in corporate accounting.

As a concept, the importance of prices reflecting actual market conditions may be a thing of the past.

Forced selling and market illiquidity are resulting in asset prices financial firms would rather not report. According to The Wall Street Journal, The Securities and Exchange Commission (SEC) is exploring ways for public companies to report a range of values for securities on their books.

Currently, the SEC requires companies to classify assets as Level I (mark-to-market), Level II (mark-to-model) and Level III (mark-to-estimate). The proposed rules would affect Level I assets, giving management leeway if it feels the market is fundamentally mispricing assets.

Congressman Barney Frank, Chairman of the House Financial Services Committee, plans to hold a hearing next month to address the "downward pull" mark-to-market accounting is having on the economy. Later in the month, Minyanville speculates, Frank plans to meet with economists to discuss repealing supply and doing away with demand.

Level I assets make up the majority of balance sheets, and the SEC's latest moves hints at the effects of marking assets to prevailing market prices. That regulators want management to massage market prices on financial reports indicates just how dire the situation is.

Forced selling into a demand vacuum for assets ranging from mortgage-backed securities to municipal bonds has pushed Thornburg Mortgage (TMA) to the brink of bankruptcy, torpedoed Carlyle Capital and threatens the solvency of some of Wall Street's biggest banks, like Bear Stearns (BSC) and Lehman Brothers (LEH).

All branches of government are in on the act. The Federal Reserve's various liquidity facilities aim to relieve pressure in capital markets until normalcy returns. Treasury's Project Lifeline is trying to protect overextended banks by keeping consumers in homes they can't afford. Now the SEC wants to give financial firms the ability to ignore market conditions to remain solvent.

Forestalling the inevitable appears to be the policy de jour.
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