Reading the dissenting views for revision to FAS 157’s fair value method, there is a strong tone of “they can’t do that”. It’s viewed as politics taking over financial reporting or the failed bankers getting their way.

The right answer for fair value is when it accurately represents recoverable cash flows of the asset at the measurement date. Current practice isn’t close to that for mbs, cdo’s & related financial assets that do not trade in active liquid markets, such as those for commodities, bonds and equities.

The debate on FAS 157’s fair value and the rescue of banking would be greatly served by disclosure of performance rates on the securities that will be subject to PPIP purchase. The taxpayer is financing 93% of the bid price and the cash flow stream on the securities will be effectively collateralizing the $trillion of US debt financing. The information warrants being in the public domain.

When the performance rates on the securities are disclosed, they can be seen against what FAS 157 is valuing the same securities at. Seeing a 65% - 85% performing range on the assets underneath the securities would do a lot to demonstrate the current 15% valuation reported on FAS 157 audited balance sheets is dubious. The audited valuation says $4 of every $5 currently performing will default, soon.

There’s a sinful amount of politics in play in the FAS 157 fair value issue, for reasons of profit and power. Much rhetoric can be displaced by a transparent disclosure of performing cash flows. Getting the standard right, accurately representing the recoverable cash flows at the measurement date, is a bi-partisan, non-profit motivated solution.

The only troubling part is that politicians and failed bankers will look like they knew something for once. But they were really just standing at the spot where a bomb went off and a lot of light flooded a heretofore shadowy place. The luck will be if it moves fair value closer to what it’s name says it is.