The very recent economic imbalance, commonly prevalent as crisis of investor's confidence is apparently fruit of previous misrepresentation in accounting information by most of the big companies and greedy motive of managements for creating fabricated market value in shorter time. Market representatives are nowadays identifying the critical reasons for this fluctuation and listed as deficient disclosures of asset values, credit obligations, risk exposer by the firms and few others.
Summary of "How to Fix Financial Reporting", By David Bogoslaw
David Bogoslaw, reporter at Dow Jones Newswires for more than six years, has identified the hidden truth consumed by the subprime market during this decay and has tried to focus on few important issues need to be implement in his article "How to Fix Financial Reporting".
After the economic down sewing of financial market, not only the effected investor but also prospective savers group hold back their investment and are waiting for a while to understand this collapsed market for a second time. Academics, researchers, journalists and members of every responsible field are expressing their views with proper evidence and providing suggestions for restoring the broken arrow of financial system. The updated voice of investors for this purpose expresses more transparency and accountability from the financial institutions to rebuild their self-reliance. Matching this interest, top bodies of most nations are meeting time to time and expressing their positive attitude to develop a trustworthy environment through creating universal reporting standard for financial reporting and risk discloser. Moreover, a more improved and fair value accounting has been suggested by a healthy number of financial analysts and regulator for improving investor's belief.
At the very outset, William Issac who was a chairman of Federal Deposit Insurance Corporation indicated the old version of rules provided by Financial Accounting Standards
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Board (FASB) for asset valuation. He generates arguments regarding Sept, 30 ruling given by FASB which permits for valuating assets according to own models condition applied if no market for that asset remains or if it is being traded at base price. He also expressed his interest for regular improvements in reporting standards. In observation with radical shift for last few decades in capital market Paul Miller, Professor in Accounting, claimed the irrational expectation of financial managers. According to him, executives are playing wrong with financial market and this market is highly sensible with the information discloser characteristics. Capital market differs with other markets in performance e.g. labour market, supply market and customers. Top managers of every financial institution are being mentioned to understand their duties as to develop investor's confidences not to spoil by fade and limited information. Market responses were not good in any ways if last financial crises are held in consider.
Frankly talking, recent economic distress erupted from risk investment which have contaminated the balance sheets of big companies. According to Miller, off-balance sheet financing and pension accounting practice under U.S. Generally Accepted Accounting Principles (GAAP) needs to be redesigned. Progress in this point is the FASB has been working together with accounting standard board in UK where all operating leases need to be mentioned on company's annual reporting. With collaboration of these two standard-setting bodies produced new standard FAS158 to report pension fund assets and liabilities on balance sheets as net amount rather than putting them as footnotes. Miller also feels a through disclosure of these items is a demand of time. Initially, calculating the loss of credit failure was impossible for the asset managers especially who were dealing with Collateralized Mortgage obligations (CMOs). When they were about to realise what they have done by repackaging of less marketable CMOs together with a bunch of less favourable mortgage and vehicle credits into collateralized Debt Obligations (CODs), it was too late. For such greedy, unsophisticated and irrational activities of financial institutions, the whole economy went under expectation. The main stream was creating derivatives of a derivatives and more without calculating actual value of the stated asset and combining less quality asset with standard derivatives. In such situation a class of experts are suggesting banks to offer very ordinary type of packages unless investors regain their confidence playing with financial instruments. Whereas, Miller oppose this suggestion by offering more accountability and transparency ensuring with the existing market nature. As a suggestion he mentioned data bank for all asset pools though some scholar as such Scott belief creating such data bank would be difficult to achieve. However, data bank may help to build confidence in investors mind as information always play vital role for creating decisions.
Furthermore, a substitute theory for creating such data pool has given by Miller is to assemble all financial reports which might be used for hedge and other asset related decisions. In the way to have such data collection, he also mentioned same computing model to be used and collecting all reports as a bundle. Rating agencies may be the first mover for doing so as they already belongs to the line and friendly with few of the models.
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In addition to this, Walter Pagano mentioned the necessity of implementing more contemporary and inflexible capital conditions for ensuring more liquidity of assets. He also emphasized on careful maintenance of asset liability ratios by the firms and enhanced corporate governance to have trustworthy balance sheet publicly.
Moreover, the greatest emphasize is pointing on electronic database of such capital information from the companies rather than big documents. Reason for this is availability of data by both investors and analysts. In supporting this requirement, Philip Moyer, Chief executive of EDGAR Online says to know properly a market; it's obvious to know the profile of the companies. And according to him, online and digital information is the absolute way of doing so. In present, many companies are allowing label items as the analysts required which must be appreciated in the long desired journey of strongest investor confidence toward capital market.
Finally, the ultimate goalmouth of this minute is to correctly identify issues liable for such economic failure and determining appropriate solution only to rebuild investor's interest towards capital market. This is the only way businesses can access to the investor's capital and again weal of economy can get a momentum. Investor's ability to excess company's information and true financial discloser by the companies may help to reach investor's confidence. Supporting this alternative Cindy Fornelli, Executive Director of a Audit firm add the importance of company's discloser ability based on some key performance. According to him, it may help investors to take comparative best decision and to restore their mental ability to participate again in capital markets. Last but not the least, more transparency and accountability in accounting practice and financial reporting is the ultimate way to reform sound and healthy economic environment.
Discussion hints in this article
It was Freddie and Fannie who shaped the blemished crops, the banks were merely intermediaries instigating credits that Freddie and Fannie painstaking "qualified" to encounter "social goals", and overlooked economic authenticity. As mentioned by Barr, Colin. (2010) when you brand "minority status" a principles for any lend, rather than a dejected payment you slip down the slippery slope.
The fact that regulators were looking into Wall Street firms' shady practices in the wake of the most devastating financial crisis and economic downturns since the 1929 crash and the Great Depression shouldn't have been a surprise to investors. Friday's news that the Securities and Exchange Commission is charging Goldman Sachs(GS 160.70, -23.57, -12.79%) with
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fraud over its handling of securities tied to subprime mortgages felt more like another unexpected aftershock of the financial-crisis earthquake.
In early stage of this article the most diplomatic and critical issue raised by author is a high shift of regulation. Especially relaxation in the regulation during last decay, in realty, starts this hard rock journey afterward which turned into worse.
Early from 19th centuries world economy is experiencing very bad experiences from capital market performance. Each and every time of the historic economic distress is the result of unhealthy game by few of the inappropriate and unexamined way of handling investor's capital. As a result, in most of the cases ultimate losers are the ultimate investors. Investor's confidence deteriorate and the more the losses the more it took time to re-establish investor's ability to play with existing capital market. Moral of this short story is not to play with capital market in amateur hand.
This article amply perform duty to address the need to inform investors about the firms standing point in every aspect; fair value of asset, transparency, accountability and confidential financial reporting. Whatever it was, it was not seen by national leaders, especially not in the United States, where pride in the superiority of our capitalist system sometimes seems to approach religious fervor. During the economic boom, most of our authorities simply denied there was a problem. Alan Greenspan, i(2007) recalled what he used to say about the housing boom: "I would like tell audiences that we were facing not a bubble but a froth- a lots of small local bubbles that never grew to a scale that could threaten the health of the overall economy"
President Bush virtually never mentioned the housing boom in the public pronouncement while it was happening. He referred only to success. IN one of his weekly radio addresses to the nation, in 2005, he boasted that "Mortgage rates are low and oner the past years the home-ownership rate in America has reached record levels".
Ben Bernank, then Chairman of the President's Council of Economic Advisers, said in 2005; "house price have risen by nearly 25 present over the past two years. Although speculative activity has increased in some areas, at a national level these price increases largly reflect strong economic fundamentals, including robust growth in jobs and incomes, low mortgage rates, steady rates of households formation and factors that the expansion of housing suuply in some areas."
These people were certainly aware of the possibility of bubbles. Indeed Greenspan must have been thinking of addressing issues that may accuse their negligence or might be tried to earn false popularity.
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Analysis
Beginning in the 1980's, we started down the road of disconnecting capitalism from risk and reward. We started disconnecting management, and their personal name, reputation, and net worth from the companies that they worked for. The company was involved in capitalism, while the management was involved in "self". Instead of management compensation going DOWN due to the risk dropping to essentially zero, we began the process of creating cross linked Boards that paid these management people as if they WERE the shareholders. This was the start of our decline for capitalism.
"What we know now, this is a company specific issue," says Dan Greenhaus, chief economic strategist at Miller Tabak. "If you are generally bullish on the economy and the markets, you should remain so. And those are that bearish will likewise remain so."
Still, markets everywhere hate uncertainty and the same applies at the Wall Street casino, where the name of the game is to determine what the majority is doing before placing bets. The Goldman event happened at a point where many have been calling for the stock market to at least take a break after six straight weeks of gains and a 15% advance from lows reached in February.
"A pause to refresh is a good thing for the market, allowing it a chance to rest before continuing its trek higher as corporate earnings and economic data points continue to improve," said Robert Pavlik (2009), chief market strategist at Banyan Partners, in a note. Whether this turns out to be a longer pause that turns into a correction is unlikely, given that a fresh batch of earnings that should mostly beat expectations is underway.
But then again, just as the aftershocks of the financial crisis continue to surprise investors when they pop out of the blue. All in a sudden, a capital market never changed in the early history of it. It's a open secrets as this crisis was well identified by regulators. They tried to hide it and restore it behind the sense. But finally what happened went away from their control. After the crisis, governments tried to fix investor's confidence by bell out or fund allocation.
As a bottom line suggestion, management of financial institution should not play with capital from investors in hide and sick style. Its proven and very obvious, capital market really response badly with false participation of any of these parties. Management should or better must inform investors regarding firm's standpoint very clearly.Financil reporting must be accurate, transparent and relevant.
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Updates of Investor Sentiment to Pre-Crisis Levels
Americans are feeling a lot better about the U.S. economy this week, according to a pair of indices tracked by Rasmussen. Investors are very bullish on the recovery. Separately, consumer sentiment has also risen. Both indices are at their highest level since early September 2008 -- prior to the climax of the financial crisis.
The first statistic, the Rasmussen Investor Index, measures the daily economic confidence of investors. It rose on Thursday to 103.2, its highest level since early September 2008. It was as low as 52.5 in 2009, but reached 150.9 in 2004.
Rasmussen's Consumer Index increased to 86.3 today. This is also the highest it has been since September 2008. It fell to 54.7 in 2009 and peaked at 127 in 2004. While it's hard to strictly compare these two indices, investors' confidence appears to be relatively higher than consumers' sentiment. Given how much better the stock market has done than the broader economy, this makes sense.
This news is important because it shows that investors and consumers have psychologically moved beyond the crisis. Sentiment is a very important indicator in economics: it reveals how much money consumers are willing to spend and the amount of cash investors are willing to put into the market. Both actions are necessary for things to improve. So barring additional unforeseen negative economic developments, this trend is another sign that the recovery is underway.
Conclusion:
While every historical event is the outcome of a combination of factors, I belief, as I argued in Irrational Exuberance, that the most important signal element to be reckoned with in understanding this or any other speculative boom is the social contagion of boom thinking mediated by the common observation of rapidly rising prices.
