Two Financial Experts Agree That The Rules Should Be Changed
Dave Ramsey and Sam Zell are two people that I have the utmost respect for. In the last 48 hours, they have both outlined how overzealous accounting has contributed to this massive financial crisis that we face.
If we simply make some accounting changes, we have the potential to free up the marketplace and allow companies to allocate their capital effectively. Right now the Market Down to Market rule is choking Wall Street which is paralyzing Main Street.
If you are involved in the housing market, read these two articles and contact your Congressman and Senator….
Remember Enron, WorldCom, Adelphia, and other companies had artificially put assets on the books? They’d say something was worth $10M when they bought it, but eventually it decreased in value, and they never updated the value in the books. That was part of the fraud. Under current laws at that time, they were all convicted and put in jail for fraud. Then we got all mad and made all these new laws that are coming out the wazoo called sarbanes oxley. It’s a huge, massive law but the idea is that we were going to mandate ethics to corporate America because apparently they didn’t have any, according to the Enron failure. It’s now a total pain in the butt to execute it in a publicly traded company.
It didn’t work because you can’t cause ethics to happen. However, it does make each company each day restate what their assets are worth if sold on the market. This accounting procedure is mark to market accounting–you need to remember that. It’s a good concept and keeps companies from having loaded balance sheets.
How This Affects Us Today
However, it’s part of what’s caused this in the news now. Merrill Lynch was sitting with $30 billion tied up in sub-prime loans with houses. Stupid! They get what they deserve for doing that, and I’m with you on that. Those houses didn’t become worthless all of a sudden because those people couldn’t sell their bonds. Since they couldn’t sell them, they basically gave them away for 22 cents on the dollar. Now do you think all those houses lost 80% of their value underneath that deal? No, they didn’t, so they gave them away for 22 cents on the dollar (about $6 billion total) because there was no market for them. Nobody wants to buy sub-prime bonds because they suck. READ MORE FROM DAVE RAMSEY ARTICLE >>>>
(Crain’s) — If Treasury Secretary Henry Paulson had only taken Sam Zell’s advice, the financial markets might not be in their current mess.
That was one view the always-opinionated Chicago investor expressed Tuesday morning at a real estate industry conference, where he offered his take on how the markets got into trouble and how they might get out.
Mr. Zell assigned much of the blame to politicians and U.S. accounting rules that have forced financial firms to write down the value of their real-estate mortgage assets, which stressed balance sheets and sent the firms on a desperate search for capital.
The billionaire financier said he called Mr. Paulson nine months ago, telling him the rules needed to be suspended, so lenders would have more discretion to assign a value to the assets.
“Without fair-value accounting, this whole situation would have never reached this level,” Mr. Zell said, adding later, “You took a big problem and turned it into a gargantuan problem.”
A spokeswoman for Mr. Paulson declined to comment, but the Securities and Exchange Commission, not the Treasury Department, has authority over U.S. accounting rules.