Distressed Assets

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of distressed assets.

Toxic Debt Sales

Unfazed by FAS 157

S&P’S NEW CMBS METHOD IS A GAME-CHANGER

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Life after the mark-to-market shift isn’t much different.

As it’s turning out, the sale—or not—of toxic debt is influenced by a lot more than just accounting rules.

Over the past few months there
have been few, if any, trades of toxic or
troubled debt securities in the public
markets. Given
the economic
environment,

this should come as little surprise—unless, that is, one was expecting a change in accounting rules made earlier this year to have had an impact.

That rule, of course, is the mark-to-market component of FAS 157.

Essentially, it requires companies to value assets on their books at the current market price.

Earlier this year, the Federal Accounting Standards

Board relaxed the standard to assist holders of securities that, while healthy, had to be valued at zero because market trading had ceased. It also—of course—assists holders of securities that may have declined in value to the point of being toxic. It will have a significant

BY ERIKA MORPHY

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impact on the $3.5 trillion worth of commercial mortgages outstanding.

Now holders of these instruments can
use an alternative procedure—such as
discounted cash flow for instance—for
valuation, Mark Grinis, a partner in
Ernst & Young’s Assurance and Advisory
Business Services practices, explains.
There were others reasons for the
change. By relaxing the
standard in this current
environment, holders of
real estate-backed paper
have a more transparent
and level standard by
which to calculate prices.
That would—it was
hoped—prompt sellers to
come to the table because
they have some expectation
of disposing of an asset at
what would otherwise be a
fire-sale rate.

There was much hand-wringing at the time by

the opposition to this move, of course.

Indeed, the arguments this group makes, which ranges from worries about sleight-of-hand accounting tricks to pragmatic concerns that holders of these securities