Experts seem to disagree how much fair-value accounting may or may not have played a role in Bear Stearns’ downfall. While some argue that the Financial Accounting Standards Board’s new fair-value standard—Financial Accounting Standard No. 157, Fair Value Measurement—caused a write-down spiral that is still descending rapidly, others argue that the financial firm’s valuations of instruments were too opaque for the investment community to understand and digest.
Financial institutions largely adopted FAS 157 as soon as it was available to them at the beginning of 2007. Among other provisions, the standard establishes three hierarchies for measuring instruments at “fair value.” At level 1, assets and liabilities are measured at easily observable market prices. At level 2, values are established using less direct market data, meaning figures that are closely related, but not exactly. At level 3, companies are using their own data... To get the full story, subscribe now.
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