Tuesday, September 30, 2008

Wesbury the Anti-Roubini

I always defended Brian Wesbury because I thought that his outlook for the economy was spot on. Wesbury, chief economist at First Trust Advisors, insists that the troubled US economy will avoid a recession which is a fairly lonely position these days even among economists. Though his view on FASB 157, SEC imposed fair-value accounting rules, misses the point.

"Things would heal very rapidly in this market"
, if the SEC would suspend fair value accounting rules, opines Wesbury. Fair-value accounting has made things worse for banks. The real value of troubled assets on the balance sheet of banks is much higher as these rules suggest because 75 percent of subprime mortgage payments are still current and on time.

Asked about the fact that the market should set the price for this hard to value assets and financial institutions should be honest about it, he maintains that the rule is bad. The bid on the table (market to market) counts only if you have to sell. "Even if you don't sell you will have to take the loss, that's why the rule is bad", says Wesbury.
What he does not seem to understand is that banks use assets on their balance sheet as collateral for doing business. Hence market to market accounting is a necessity.

As everyone except Wesbury knows "Enron accounting" is illegal and banks had to reroute risky assets (from ABS to credit derivatives) from off shore accounts and SIVs onto their balance sheets. The banks are now stuck with these assets because there are no bids on the table or the bids are so low that they would bankrupt the balance sheet. A suspension of FASB 157 would therefore do nothing to alleviate the solvency problem of financial institutions caused by erosion of their capital. Only a massive injection of capital can avert a financial implosion. To his credit Wesbur
y is in favor of the $700 billion bail out plan, which would help to recapitalize financial institutions.

If he is dead wrong on this critical issue of solvency I suspect that his outlook for the economy is loosing its merit too. Below is the complete CNBC interview.

click for video

source: Attention Turns to the Fed



SEC And FASB: Clarifications on Fair Value Accounting

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