Monday, 12 November 2007

FAS 157

"The risk of a worldwide banking crisis – one that is particularly damaging to mortgages, private equity, hedge funds and the banks themselves – is higher than it was a month ago, and the storm is rising." - William Rees-Mogg1

I got onto this through reading an article at PJC Journal. Alongside some frankly rather nutty-sounding stuff from one Hal Lindsey2 (US Christian-right author of 'Satan is Alive & Well on Planet Earth'3 among other books), there is (via another blog4), a link to an interesting comment piece in today's Times.

Entitled 'Why FAS 157 strikes dread into bankers', the article explains that new US accounting standards introduced to regulate the valuation of banks' assets, which come into force on November 15th5 "could have disastrous, though unintended, consequences". A layman as far as high finance goes, jargon like 'level-three assets' is as unfamiliar to me as the regulations themselves.

Well-known as he is for his intelligent postings on the subject of economics, perhaps Tim Worstall can enlighten me. His post on the Trading Floor blog at The Business magazine explains:

"Essentially, it's an attempt to make the books of banks actually reflect their true value. [With FAS 157] instead of [assets] being worth whatever the bank said they're worth, there has to be at least some attempt at listing them at their possible sale price." - Tim Worstall

All does appear well and good on the surface - Surely greater transparency is a good thing. Unfortunately, the consequences of the enforcement of 'Fair Value Measurements'5, in terms of the revaluation of bank assets are threatening to bring about a further credit squeeze, potentially increasing the severity of the lending crisis that has already hit in the US6 and precipitated the Northern Rock crisis7 here in the UK.

As banks are made to come clean about their chronic over-valuation of these "artificial"1 assets (the current valuation system has been described by one senior banker as "mark to make believe"8), it looks likely that ordinary people will suffer as a result of the ensuing economic slump - Rees-Mogg predicts a worsening of conditions for first-time buyers and a downturn in stock markets.

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