"CALVIN BALL" ACCOUNTING FROM THE SEC

If you don't know what Calvin Ball is, go here. The key rule in this context is:

1.2. Any player may declare a new rule at any point in the game (Figure 1.2). The player may do this audibly or silently depending on what zone (Refer to Rule 1.5) the player is in.

Ok, the SEC meanies last November required firms to mark their assets to what the market would actually pay for them. Because of the Big Shitpile, a lot of them are whining:

SEC Loosens Accounting Rule Banks Blame for Crisis
Firms Granted Leeway to Value Complex Mortgage-Related Investment
By Carrie Johnson
Washington Post Staff Writer
Tuesday, September 30, 2008; 6:24 PM

Under intense political pressure, regulators for securities and accounting standards this afternoon issued what they called a "clarification" to provisions that have come under fire from bank executives and some lawmakers for contributing to the credit crisis.

Regulators said that the new guidance will help companies figure out the value of complex mortgage-related investments at a time when there are few trading partners willing to purchase them.

This is from the SEC's press release:

Can management's internal assumptions (e.g., expected cash flows) be used to measure fair value when relevant market evidence does not exist?

Yes. When an active market for a security does not exist, the use of management estimates that incorporate current market participant expectations of future cash flows, and include appropriate risk premiums, is acceptable. Statement 157 discusses a range of information and valuation techniques that a reasonable preparer might use to estimate fair value when relevant market data may be unavailable, which may be the case during this period of market uncertainty. This can, in appropriate circumstances, include expected cash flows from an asset. Further, in some cases using unobservable inputs (level 3) might be more appropriate than using observable inputs (level 2); for example, when significant adjustments are required to available observable inputs it may be appropriate to utilize an estimate based primarily on unobservable inputs. The determination of fair value often requires significant judgment. In some cases, multiple inputs from different sources may collectively provide the best evidence of fair value. In these cases expected cash flows would be considered alongside other relevant information. The weighting of the inputs in the fair value estimate will depend on the extent to which they provide information about the value of an asset or liability and are relevant in developing a reasonable estimate.

Now, letting the MOTU use their internal models to value assets has one very serious problem: THEIR MODELS SUCK! and here's proof:

“We were seeing things that were 25-standard deviation moves, several days in a row,” said David Viniar, Goldman’s chief financial officer.