FASB is the Financial Accounting Standards Board. FASB 157 is an accounting rule that requires businesses to assess the value of any asset (commodity, equity, bond, real estate, etc.) according to what the company can sell it for at the time of a financial report. What's it worth? What can you get for it? Or in the words of the FASB:
The definition of fair value retains the exchange price notion in earlier definitions of fair value. This Statement clarifies that the exchange price is the price in an orderly transaction between market participants to sell the asset or transfer the liability in the market in which the reporting entity would transact for the asset or liability, that is, the principal or most advantageous market for the asset or liability. The transaction to sell the asset or transfer the liability is a hypothetical transaction at the measurement date, considered from the perspective of a market participant that holds the asset or owes the liability. Therefore, the definition focuses on the price that would be received to sell the asset or paid to transfer the liability (an exit price), not the price that would be paid to acquire the asset or received to assume the liability (an entry price).Works for me. My car was worth about what I paid for it five years ago. But I can't get that much for it today.
But suppose you're a big bank and you own baskets and buckets and truckloads of paper with names like collateralized debt obligations and other "complex financial instruments." And suppose you paid for your derivatives with real money (which you borrowed). But now the value of the stuff upon which the cost of the derivatives was originally determined has tanked (say in a burst real estate bubble), and nobody really wants to buy your paper from you anymore. What can you do?
Well you can get your friends in Congress to change the rules maybe. The argument is that the decline in real value of the underlying assets, even factoring in the huge numbers of mortgage defaults, is not so low as what the current market for mortgage-backed securities would have it.
So back in July when Merrill Lynch (remember them?) dumped CDOs that were once valued at $30 billion for about 22 cents on the dollar, that didn't really reflect their really real value. And when Merrill agreed to finance 75% of the transaction, the nickel plus on the buck they actually realized from the sale didn't really reflect the ultimate beyond all the fog truly really real value either.
The market is just spooked right now about reams of CDO paper, you see. The market value of mortgage-backed securities just doesn't reflect what they're worth. So when your quarterly report to shareholders about the health of your business comes due, you can pull valuations of unsalable "assets" out of your puckered ass to claim your tanking financials actually are just dandy. You just can't sell them to anybody for what they're worth.
This is to say that market capitalism doesn't work. Tell it to my '03 Honda Element.
The people pushing to change accounting rules like FASB 157 appear to think that saying things are better than they are will make things better than they are. Such magical thinking is of a piece with a long list of right wing ideologue nonsense ranging from "heckuva job Brownie" to McCain advisor John Goodman claiming that there are no uninsured people in America because of rules requiring emergency room assistance. They live in a pretend world full of happy, optimistic, smiling nutcases.
The stupidest aspect to all this is that a few congressmen say they'll vote for the bailout next time around if FASB 157 is suspended for a couple of years. It's just one of those troublesome regulations that get in the way of free markets.
How can the idiots even dress themselves?