DID A LETTER RELEASED LATE FRIDAY by the SEC about an arcane accounting rule provide the spark that set off the stock market's explosive rally this week?
Led by financials, the Dow Jones Industrial Average Tuesday recouped nearly 400 of the 1,000 points it surrendered in the first quarter. The Financial Select SPDR surged 7% in the session, halving the nearly 14% negative first-quarter total return in the exchange-traded fund's net-asset value, as calculated by Morningstar.
Fuel, air and a spark are required for combustion. You can have a full tank of gasoline, but a blocked air filter or a fouled spark plug will prevent an engine from starting.
In this case, the spark may have come from a letter posted on the Securities and Exchange Commission's Web site Friday afternoon regarding Statement of Financial Accounting Standards 157, which attempts to deal with the knotty problem of placing a "fair value" on a company's assets.
Easier said than done, especially for inscrutable assets, such as derivatives, that SFAS 157 places in so-called Level 3. Those have no "unobservable inputs," in the parlance of the Financial Accounting Standards Board. Or, as former Defense Secretary Don Rumsfeld might have defined them, these are "known unknowns." We may know what collateralized debt obligations are, but who knows what they're worth?
(For the record, Level 1 assets are those for which there are active quoted markets. Level 2 assets may not have quoted prices, but there are comparable assets to provide "observable inputs" that can impart some information about their values.)
Late Friday, the SEC tried to clarify one aspect of this accounting arcana for these topsy-turvy times. Companies should use market prices to value assets, even when markets are less liquid than normal -- "unless those prices are the result of a forced liquidation or distressed sale."
"Ay Caramba!" as Bart Simpson might say. This lets everybody off the hook.
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