Welcome to Scribd. Sign in or start your free trial to enjoy unlimited e-books, audiobooks & documents.Find out more
Standard view
Full view
of .
Look up keyword
Like this
0 of .
Results for:
No results containing your search query
P. 1
Is It Fair to Blame for Financial Crisis1

Is It Fair to Blame for Financial Crisis1

|Views: 13|Likes:
Published by mehul

More info:

Published by: mehul on Oct 13, 2010
Copyright:Attribution Non-commercial


Read on Scribd mobile: iPhone, iPad and Android.
download as PDF, TXT or read online from Scribd
See more
See less





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-primemortgages, credit default swaps, or excessive debt? None the those,steve forbes , chairmen of the Forbes Media & sometime politicalcandidate. The main reason for the crisis i
s “mark 
(Fair value accounting).
First of all we understand the concept of “mark 
Marking to market is the practice of revaluing an asset quarterlyaccording to the price it would fetch if sold on the open market. Here thehistorical cost is outdated for valuing the assets. It is a key component of what is known as fair value accounting & it is the hottest accountingdebate 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 keyassets held by their institutions to unprecedented lows.This is the obvious reason because if the bank giving loan on thehistorical price of the assets but they are ignoring the market value of theassets. 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 historicalprice 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 thetrue value. So the marking-to-market pushed many banks toward
insolvency & forced them to unload assets at low price, which thencaused values to fall even further.Yet mark-to-market accounting continues to have its proponents, whoare equally adamant. Lisa Koonce ,an accounting professor wrote that
this is simply a case of blaming the messenger. Fair value accounting isnot the cause of the current crisis. The reasons for it are such baddecisions as granting su
 bprime loans & writing credit default swaps…”
 The investment advisory group of the Financial Accounting StandardsBoard (FASB) stressed that it is especially critical that fair valueinformation be available to capital providers & other users of financialstatements in periods of market turmoil accompanied by liquiditycrunches. This view suggests that banks should mark their bonds to thecurrent market price, so the investors would become certain & nothaving 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 theprices of the mortgage-related securities. Nor do want to hide bank losses from investors & delay the clean-up of toxic assets as happened inJapan in the decades after 1990. We only want the some newmultidimensional approaches which regulate both bankers & investors tofinancial reporting.(Next article:
myths of the game
by mehul sangani )Mehul Sangani(MBA 3

You're Reading a Free Preview

/*********** DO NOT ALTER ANYTHING BELOW THIS LINE ! ************/ var s_code=s.t();if(s_code)document.write(s_code)//-->