The trouble with the fair value standard of reporting is it’s tied to the markets for supplying the “fair” in value and the markets cannot deliver. The liquidity and leverage driving observable spot prices of assets in global markets this decade have behaved anything but fair and orderly.

An asset grab practice has emerged, where vast pools of institutional and nation-based liquidity pour into an asset class, commandeering price . The stampede is customarily accompanied by an anecdotal shortage story being driven ahead of it.

The practice proceeds with impunity because of an apparent paucity of staffing or competence in the public sector for conducting meaningful analysis to differentiate valid supply shortages from the apocryphal. The private analytical sector demonstrated it cannot be objective or competent, with its complicent fanning and promotion of the asset runs in stocks and then housing securitization. With both runs ending in asset price collapse and federal intervention to stem broader economic failure.

As a result, unhedged assets & liabilities that already require fair value reporting, along with anyone that elects it pursuant to FAS 159, are signed up for a lethal dose of what the standard set out to avoid:

“…mitigate volatility in reported earnings caused by measuring related assets and liabilities differently…”

(FAS 159, par 1, Objective)

Earnings and balance sheets reporting under the fair value standard are subject to wild gyrations from one quarter to the next. The swell of globalization’s investment liquidity and leverage has demonstrated its capacity to trample historical price stability in ocean size public-use asset classes for housing, energy, metals and food commodities. The investment level of cash in these asset classes is mammoth and government policy makers have exhibited no tools to steady the related markets, to date.

Prices get squeezed to the clouds as exponential liquidity growth from real and debt fueled cash flows pour into the limited amount of available asset contracts (there has to be a real asset underneath a long commodity contract), carrying values higher until the onset of vertigo convinces the savvier hands to exit. Way down below, the bankers, pensions, endowments and state budgets stand amid the streamers and party hats of last call, that they missed, bag in hand.

Who wouldn’t want to use observable spot market prices as the basis for valuing closely watched quarterly results and carefully constructed balance sheets?

Fair value, indeed.