Flawed Assumption Underlying Fair Value

The Insitutional Risk Analyst identifies the flawed assumption underlying the notion of fair value.

First, FVA relies on efficient market theory, namely that short term price = value and that consequently income, assets and liabilities should be adjusted in real time to reflect same.... We think that the collapse of all of the other market efficiency based constructs, from structured assets to hedge funds, ends the discussion of derivative notions such as FVA.

Second, FVA fails to recognize the historical role of depositories, pensions and insurance companies as repositories for long-term value and consequently as havens from swings in short-term market pricing and economic trends.

While Geithner's announcement didn't include any explicit plans for a further relaxation of mark-to-market accounting, a read between the lines suggest that's the direction he's heading. In my mind, this paragraph from the fact sheet is the tell:

The Treasury Department will work with bank supervisors and the Securities and Exchange Commission and accounting standard setters in their efforts to improve public disclosure by banks. This effort will include measures to improve the disclosure of the exposures on bank balance sheets. In conducting these exercises, supervisors recognize the need not to adopt an overly conservative posture or take steps that could inappropriately constrain lending.

Call it "Increased Transparency and Disclosure" while signalling a willingness to give banks some breathing space. Orwellian, isn't it?