Portland Mortgage Broker

Last week, I wrote about rule 157 of the Sarbanes-Oxley Act (SOX) and how it plays a significant role in what our nation’s best lenders are writing off as losses today. Now, I’d like to finish up with what I think is the best solution to this problem.

To recap last week’s post, SOX was directly targeted at increasing transparency and accountability amongst Wall Street’s corporate culture. It forces corporations to value their assets & holdings at current prices, with no weight given to future cash flows or appreciation. This worked great, until a major flaw was identified with this rule about 18 months ago when assets started slipping in value. The writeoffs have drained otherwise great, longstanding corporations of their reserves and forced them to seek hastily-assembled mergers or bankruptcy actions. I’m now going to delve right into how this could be fixed, but I strongly urge you to take a few moments and read my prior post before continuing if you haven’t already.

It is true that the root of our current crisis is bad mortgage loans, but because our market is so illiquid now this problem is being magnified to ridiculous levels by mark-to-market accounting principles. The rule fails to take into consideration any market parameters outside of the most recent price for which a similar asset sold, stipulating instead that every similar asset in the world is now worth exactly that price. Most of us are not corporate executives, but we reasonably understand that selling our home for full price will take longer than dumping it on the market at a price that will make it move in 10 days. The same holds true for our cars, or any other significant household asset we may need to dispose of in the future.

So how do we fix this? We could return to the pre-SOX days where market prices were determined entirely by supply and demand, or we could figure out some sort of compromise that retains some features of rule 157. An example of the latter might be assessing an average sales price over the last 3 years – similar to how a real estate appraiser is allowed to go back 6 months for his comparables.

Rest assured, something needs to be done about rule 157 before this mess will fix itself. I can’t figure out a single solution to turn this downward-trending spiral around, if rule 157 is allowed to exist as-is. I’ve read information from well-respected authors in the business community who attribute up to 70% of our current crisis to this rule. This would turn the $1.4 trillion runaway train we’re chasing now into a much more manageable $420 billion blip on our radar screen. Yes, it’s still a significant problem, but it wouldn’t have required passage of a $700 billion bailout program to fix it.

I hope this information has made sense, and most of all, been at least somewhat useful to you in figuring out what’s going on today. The primary concept to remember is, a paper loss is not a realized loss until the moment the asset is disposed of. It is at the time of the sale where money is either made or lost, not somewhere in between.