More on the lack of confidence in our debt markets

BVWireIssue #70-2
July 9, 2008

Dexter Braff (Braff Group, Pittsburgh) responded to the July 2nd BVWire article titled "A private equity leader attempts to blame the accountants for credit market crisis… " that discussed an article in The New York Times where Mr. Schwarzman, co-founder of the Blackstone Group, blamed FAS 157 for the credit market crisis.  Braff wrote:

I also saw the article you cited in the New York Times and came away far more sympathetic to Mr. Schwarzman’s observations.  It comes down to the difference between fair market value and investment value.  In this situation, we are in the midst of an accelerating downward spiral in confidence in the debt markets.  Some is real.  But some is also a function of emotion and pure momentum – the same intangibles, we might add, that drove market clearing values for the dot coms to “unreal” heights. 

So it comes as no surprise that in this highly charged time, buyers of debt have fled the market, sending, in our opinion, investment values below what the pure risk-return (i.e. fair market value) fundamentals would suggest.  As middle market investment bankers specializing in health care, we see this type of situation quite frequently, when buyers flee the acquisition market in response to an unstable reimbursement climate.  While the underlying value of attractive acquisition candidates may have fallen with the risk of the unknown, did they drop to zero?  Of course not, even though buyers, at least temporarily, may be on the sidelines.  One final thought.  Mr. Schwarzman can’t have it both ways.  When an over-inflated, hyperactive market inflates the value of debt, that should be factored out as well.

In a related matter, on July 3rd, the International Accounting Standards Board (IASB) created a dedicated section of their website that outlines their response to the credit crisis and provides links to related meetings, announcements and speeches.  Access to this new section can be found here.  The core of the IASB’s response addresses:

  1. Off balance sheet: The IASB should improve the accounting and disclosure standards for off balance sheet vehicles on an accelerated basis and work with other standard-setters toward international convergence.
  2. Fair value in illiquid markets: The IASB should enhance its guidance on valuing financial instruments when markets are no longer active. To this end, it will set up an expert advisory panel in 2008.
  3. Disclosure: The IASB will strengthen its standards to achieve better disclosures about valuations, methodologies and the uncertainty associated with valuations.
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