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How Fair Value Works When Liquidity Dries Up

Colleen Cunningham | May 28, 2008

My name is Colleen Cunningham, and I weigh 7 pounds, 2 ounces—at least, I do if you go by historical cost accounting.

After all, that was my weight at birth, and that’s how historical accounting works, right? Of course, if I say I weigh 110 pounds that would be much closer to reality (although still biased toward underestimating true value, unfortunately!).

At the risk of being pigeonholed as being a one-topic columnist, it is hard not to comment on what is happening in the credit markets and its inescapable link to fair-value accounting. Many point fingers of blame at securitization accounting, the bundling of loans into assets that are sold to investors. Even Barney Frank, the Massachusetts Congressman who chairs the House Financial Services Committee, recently said securitization “has severely dissolved the discipline of the lender-borrower relationship … Diversifying bad...

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