How would you propose firms determine fair value in distressed market? Would you have allowed firms to use a different pricing strategy, or do you believe that fair values are highly informative, even when markets are not orderly?
Through turbulent financial markets in 2007 and 2008, large financial institutions, particularly in the United States, recognized significant losses when they wrote down investments consisting of mortgage-backed securities. One issue was how to measure fair value for these investments. Some institutions might have been forced to “dump” comparable securities at short notice and at artificially low prices because of their internal financial constraints. These actual transactions then created reference prices for portfolios of investments in all financial markets and all companies. Some claimed that these fair values were not realistic and that the reference prices forced write downs that further exacerbated financial constraints.
Imagine you are the FASB and are asked to come up with a solution to this problem. How would you propose firms determine fair value? Would you have allowed firms to use a different pricing strategy, or do you believe that fair values are highly informative, even when markets are not orderly?