Subject: Request for SEC Chief Accountant Consideration of Certain FAS157 Items

September 28, 2008

Dear Sir:

I am writing to request your kind attention to the following items related to FAS157, Fair Value Measurement. I am writing from my vantage point as a former banker, a former member of the National Office of PWC, and as a frequent Instructor on accounting topics. As an accounting Educator much of what I am conveying today reflects both the financial preparer segment of the US GAAP constituency (through CPE courses) and what the FASB could call financial statement users with "requisite knowledge" (my undergrad students at Columbia University who encounter Accounting and Fair Value for the first time through me).

Before launching into the details I would also like to express my continued admiration for the SEC Chief Accountant and the members and staff of the SEC who have acted from time to time on accounting issues that I encounter in my day-to-day work on stock options, derivatives and hedging and now Fair Value. Your value-added has been self-evident and I thank you most sincerely.

As you will see some of the items I suggest for your attention would offer opportunities to avert further market disruptions that might be prompted by the misuse of accounting.

1. Application of FAS157 to Non Financial Items

The effective date of FAS157 was postponed for non financial items by the FASB under an FSP to financial periods beginning after November 15, 2008.

I have written to the technical director of the FASB to request a further postponement and the re-opening of deliberations so that affected FAS157 users could improve their abilities to apply FAS157. I was prompted to write principally by owners of substantial commercial real estate assets, but in writing it became clear to me that in the current market the FAS157 measurement of residential mortgage collateral and items in finance strategies known as ALT-A, asset backed securities and credit default swaps requires special consideration.

I hope you will agree to this request.


2. Fair Value when Market Prices are Not Available

Either the SEC Office of Economic Analysis supporting the SEC Chief Accountant or the FASB Staff or both should reconsider the application of FAS157 when markets do not exist. I am writing on the afternoon of Sunday, September 28 when the Paulson-Congressional Capital Markets proposals have not yet been finalized and their impact will not be fully understood for some time.

Meanwhile the IASB has issued their 09-16-2008 draft document on the topic of Fair Value when markets are illiquid. I am reaching beyond that to the state when markets do not exist. When Secretary Paulson states that credit markets have "seized up" and when the ISDA fights through a weekend for netting agreements on Lehman Brothers Credit Derivatives, we have such markets where prices do not exist - yet it does not mean that a Fair Value cannot be determined for financial reporting purposes.

FAS157 does not adequately address the evaporation of market pricing mechanisms for items where they once existed ("price discovery" as the term was used in the SEC Conference on Fair Value). An absent market can still support a mark-to-model approach, with proper assumptions (See the First Quarter 10-Q 2008 AIG for its adjustments or the final fair value adjustments reported in the Merrill Lynch 10-Q for the third quarter of 2007 - these may or may not be appropriate FAS157 measures but are apt examples of the importance of refining assumptions.)

The absence of prices is a condition more severe than the absence of markets - in the extreme it means that the methods envisaged in FAS157 do not work. An example is the setting when liquidity disappears from the market. Liquidity is both an input into FAS157 measures and is a measure that is used by financial statement users to determine how much liquidity to provide a market (John Thain at Merrill Lynch made a more complete but succinct description in 2007 of this dynamic.)

At a minimum what I was hoping for was some, or all, of the following actions:
1. Action 1: Voice support for the deliberations of the IASB working group and state clearly whether and how their conclusions can be used for US GAAP (this is an opportunity for complete convergence on one topic).
2. Action 2: Provide an SAB for guidance either with or without pending FASB guidance which the SEC Chief Accountant could demand. It may take some time to scope out the Fair VAlue issues that require attention - stating that markets are illiquid or that markets are absent may be too broad, but it is a starting point. SAB 107 and SAB 110 are two examples of how the SEC staff has improved accounting - in the area of stock option expensing - by offering clarifications. SABs have the advantage that they can be issued with speed and target specific concerns.
3. Action 3: Prepare a working group or watch group to monitor the market reactions to the proposed Paulson plan and the attendant legislation. At $ 700 billion, we can expect new capital market effects in addition to the hoped-for solution and these effects might have accounting implications. We should prepare to observe them and then be ahead of the game in formulating responses if needed. If you include "outsiders" rather than SEC staff or in addition to staff, I would be pleased to help.


3. Preparation of September 30 - 2008 quarterly filings to the SEC including SEC FORM 10-Qs

We do not know if the current proposed Paulson actions will have their desired effect for market purposes by September 30. It is unlikely because of their long term nature and the late hour for the legislation.

Therefore it would be helpful if the SEC Chief Accountant's office would consider evaluating quickly whether detailed guidance for FAS157 measures as of 9-30-2008 should be developed. At a minimum stating that the OCA is watching over the Fair Value process and market conditions would be most helpful.


I hope you will consider my requests and also that you will call on me if you need any further information.

Thank you very much



Louis Le Guyader
East Islip New York