As MBS and related losses continue to pile up at commercial and investment banks, a senior official with the Securities and Exchange Commission told Reuters on Thursday that the government agency may need to issue guidance on so-called “fair value accounting” methods. In a nutshell, the problem lies with so-called Level 3 assets — the hardest to value, mostly illiquid securities that have been at the heart of much of the financial market’s credit crunching — which a growing number of industry participants have said are nearly impossible to price properly given current market conditions. Via Reuters, remarks made by SEC commissioner Paul Atkins:
“If you have no value for something because there are no market values to be reflected, then you have to ask whether or not that is truly reflective of what the asset is worth,” Atkins told Reuters in an interview. “I think we need to come out with guidance to help people deal with that situation,” he said.
The meaning of “that situation” that Atkins refers to depends on who you ask. Housing Wire’s various sources in the secondary and primary mortgage markets have suggested alternatively that banks either aren’t marking their assets down enough, while still others suggest that current values on the books are too aggressive and don’t reflect the true value of an asset. This list of Level 3 assets in the current market is a long one, and includes private jumbo and Alt-A bonds, subprime paper as well as other structured products, such as ABS CDOs and CLOs — as the credit crunch rolls on, other assets may yet be thrown into the Level 3 fire, HW’s sources said. Confusion over valuation notwithstanding, Atkins’ remarks seemed likely to surprise key market participants, many of whom earlier had said they did not expect the SEC to signal that it was willing to offer guidance on the subject. The SEC does not yet have a timetable set for when it expects to issue guidance on fair value methods, Reuters reported.