CFA Institute Survey on the Credit Meltdown

Attached is an interesting survey from the CFA Institute on mark-to-market accounting and asset valuations.

The CFA Institute, the organization of certified financial analysts, distributed a questionnaire to its members on Thursday, and so far has received more than 5,000 responses from people whose job it is to review financial statements and make investment recommendations.

It should come as no surprise that they are more concerned about banks overvaluing assets than about the possibility that mark-to-market accounting is causing assets to be valued at unreasonably low levels.

They were asked for opinions on the importance of several possible causes of market volatility, on a scale of 1 for no importance to 5 for major importance. They could rate as many of them as very important as they wished.

Here are the percentages who rated each factor as 4 or 5, meaning they thought it played a significant role.

Unwillingness of commercial banks to lend to one another: 88%

Concern about likelihood of global recession: 78%

Concern that financial institutions continue to hold assets at values that do not accurately reflect current market value: 75%

Lack of coordinated action by regulators across regions: 40%

Mark-to-market accounting: 36%

Slow pace of implementation of U.S. bailout plan: 31%

End of ban on short-selling: 20%

More analysts thought mark-to-market deserved a one or a two (39%) than deemed it important. A majority (58%) also thought that “full disclosure of bank assets, asset valuations and valuation assumptions” would help to unfreeze the credit markets.

Now that the banks can be recapitalized by the government, they should be eager to get the bad news behind them by marking toxic assets at toxic levels.

You would think that, having been proven to be so wrong about these assets — that is how they got into this mess — the banks would be a little humble about insisting that their valuations now should be relied upon even if no one is willing to pay the prices they calculate.

Despite the rhetoric of frozen markets, there are some trades, and there will be more as Fannie Mae and Freddie Mac step up purchases.

If the banks believe that the market price is a fire-sale price, they can use some of the government cash to buy the assets cheap, and profit if they turn out to be right. Those purchases could also drive up the market price.

If not, why should anyone believe their protestation that the problem is the accounting, rather than the assets themselves?

Floyd Norris -- Notions on High and Low Finance

EconomicsRichard M. Todd