FAS 157: This is No Rumor

Was the rumor that Warren Buffett is kicking the tires at Bear Stearns just a pathetic attempt to generate page views?

Perhaps those sleuths at the gray lady should spend some time doing a little book learnin'. Maybe they could read up on FAS 157 and get back to us. After all, November 15th looms large.

Summary of Statement No. 157
Fair Value Measurements

Summary

This Statement defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles (GAAP), and expands disclosures about fair value measurements. This Statement applies under other accounting pronouncements that require or permit fair value measurements, the Board having previously concluded in those accounting pronouncements that fair value is the relevant measurement attribute. Accordingly, this Statement does not require any new fair value measurements. However, for some entities, the application of this Statement will change current practice. FASB

A year ago the FASB issued Statement number 157, which provides guidance for using fair value to measure assets and liabilities, and should result in a consistent approach to valuing complicated instruments. You might not have a degree or interest in accounting, but you might have an interest in Bear Stearns' stock and want to briefly peruse Level 3 exposure on Wall Street.

The recent round of conference calls by the big brokers were slow going due to a breakdown of assets in the various ratings tiers. A lengthy explanation might be beyond the scope of a blog, but suffice to say that Level 1 is the highest quality, Level 2 is less so and Level 3 is a fantasy land of toxic garbage..

The Level 3 breakdowns as a % of pre-tax income for the big banks and brokers are approximately as follows, assuming our math is on target and our sources are accurate:

BAC...10%

LEH....12%

MER...15%

JPM....18%

C........20%

GS......22%

MS......22%

BSC....42%

Perhaps the New York Times can discuss this issue instead of floating BS rumors. That does not stand for Bear Stearns. By the way, the rumor mill has Bear raising at least $500 million in 10-year bonds, and they apparently garnered the fifth level of investment grade from the ratings agencies. Do they need that equity now?

Summary of Statement No. 157
FASB

FASB 157 In Plain English
Ernst & Young
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The content contained represent the opinions of 1440 Wall Street. This commentary in no way constitutes a solicitation of business or investment advice. It is intended solely for the entertainment of the reader, and the author. No Position BSC

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