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May 20, 2008
The valuation crisis
Apropos the last posting on "earnings management", do we now need a new term for "asset valuation management"?
See this story from last weeks' New York Times - A Values Debate (Not the Political Kind) -
But on Thursday, at conference hosted by Standard & Poor’s in New York, several bankers complained that they have felt pressured by accountants and regulators to undervalue assets in recent months.
Accountants countered that the bankers, like any investor or homeowner, simply do not like seeing their investments drop.
“People were saying, ‘We’ve got to face up to the fact that we are selling things we don’t know how to value,’ ” said Rebecca T. McEnally, senior analyst at the CFA Institute, a nonprofit organization for investors.
I think Ms. McEnally is exactly right. But it does not extend solely to existing exotic financial instruments. There are a number of hard-to-value assets which are traded every day -- many of which fall under the classification of "intangibles". Since the markets for these assets are thin, it is difficult for outside parties to understand the valuation -- which is created in a private negotiation between the buyers and sellers. What new need is a system for better transparency in these hard-to-value assets. And a greater understand and appreciation for their volatility. Any system created to deal with the current hard-to-value financial instruments needs to also understand these other assets -- and can be used for a more general model of asset valuation, including for intangibles.
Posted by Ken Jarboe at May 20, 2008 10:10 AM
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