Fair Value Lying

Posted 02 Apr 2009

Accurate, transparent, comparable and thorough financial statements are essential tools for performing mental calculations of value.  Being able to assess and weigh the performance of a going concern is vital for a holder of capital considering allocation to more productive uses which benefit humanity.

 Trust in the accuracy, transparency, comparability and thoroughness of financial statements is indispensable.  When that trust is lost then holders of capital rapidly retreat from risk and seek safer and less risky assets.

The Financial Accounting Standards Board asserts, "The capital markets and government are comprised of many participants with competing demands, requirements, and proprietary interests. As independent entities without a political or commercial stake in a particular outcome, the FAF’s standard-setting Boards, the FASB and the GASB, provide objectivity and integrity to our country’s financial reporting system."


Financial companies have used their agents, U.S. lawmakers, to pressure the FASB to relax fair-value accounting rules.  Yahoo! Finance reports, "The changes will allow the assets to be valued at what they would go for in an "orderly" sale, as opposed to a forced or distressed sale.

The new guidelines will apply to the second quarter that began this month."  Bloomberg reports, "Wells Fargo and other banks argue the rule doesn’t make sense when trading has dried up because it forces companies to write down assets to fire-sale prices."


Months ago at a conference I was talking with a senior partner at DLA Piper.  We discussed mark-to-market accounting and I made the assertion that if there is no bid then the asset may be worthless.

 He retorted with, 'It is hard to say that a 60 story office building in New York is worthless.'  As the conversation progressed he told me a story.

One of his clients bought $1B of assets from Lehman Brothers which were to be sold back within a month.  Two weeks after the sale Lehman Brothers evaporated and the client received a tough lesson regarding counter-party risk.  His client left a quagmire of documents they assumed would never be read because of 'orderly' sales and instead asked what him what they owned.

After several weeks of reading and analyzing the documents while being paid hundreds of dollars per hour to do so he came back with some grim conclusions.  They owned about 65 various real estate assets; including one large condominium complex in Texas.

 Many of the various assets had clauses which required further capital injections so the European bank has opened an office in New York and relocated employees to service the assets.  But those assets all pale in comparison to this condominium complex.

Only about 15% of the units had been sold, it was built on shifting sand, the local government had condemned it and decreed it would have to be demolished.  With a sly smirk I responded, "It seems the skyscraper with no bid is worth less than worthless."


The recent FASB changes to relax fair-value accounting have a secondary purpose:  To perpetuate fair value lying to protect the worthless, or in some cases worse than worthless, financial statements of zombie banks.  The vernerable banking behemoths, Bank of America and Citigroup, have become Single Digit Midgets.  What type of objectivity and integrity do these rules have?

How long will it take other banks like Wells Fargo, US Bancorp or Credit Suisse Group with their approximately $15.50, $15.50 and $34.50 share price respectively and below $65B, $27B and $40B market cap respectively to join the ranks of the single digit midgets?

 While fair value lying may help the stock prices in the short term; the fundamentals are horrific for value investors.

Sure, they were profitable for a quarter but it was all an illusion based on bailout money funneled through the apparation AIG.  These stolen funds also found their way, of course, to Goldman Sachs, JP Morgan, and $35B ended up in European banks like Deutsche Bank.  Is it any surprise that there is a new dress code for bankers at parties like those outside the G-20?


But the primary purpose of these changes that have their catalyst in Washington and Wall Street appear to be to intentionally exacerbate the greater depression and postpone the credit contraction.

Perhaps the inmates infected with the financial insanity virus who are running the asylum have a King Canute complex where he decreed, "And then he spoke to the rising sea saying “You are part of my dominion, and the ground that I am seated upon is mine, nor has anyone disobeyed my orders with impunity. Therefore, I order you not to rise onto my land, nor to wet the clothes or body of your Lord”.

The great credit contraction should not be feared but embraced.  The result is that the malinvestment during the credit expansion which has severely damaged the world economy is liquidated and no additional malinvestment results.

 This is because capital seeks safer and more liquid assets as it moves down the liquidity pyramid.  It is important to point out that the ETFs GLD and SLV have problems and do not have the same risk or liquidity profile as physical gold or silver.

The institution of fair-value lying and Geithner's plan for toxic assets, which is how the banks will siphon more wealth out of the world economy to feed their parasitical vampiric appetite, are but vain attempts to entice capital to move up the liquidity pyramid.

 Gold loves truth and has no fear of accurate, transparent, comparable and thorough financial statements and those who trust in it build their financial castle on the immortal unchanging element.  In contrast, fiat currency loves lies, cannot withstand the sun of scrutiny and those who trust in it are building their financial condominium on sand.  The great credit contraction has arrived and only begun.

Disclosure:  Long physical gold and silver with no positions in GLD, SLV, BAC, C, WFC, USB, CS, GS, JPM.