Subject: File No. 4-573
From: Chris Lane

October 9, 2008

As a former CPA and bank auditor and long time professional investor, please consider the below. Our country’s future economic well being is dependent on making immediate changes and explaining the reasons for the changes. Disclosure of Fair value would provide transparency without forcing institutions into insolvency based on short term market swings and accounting rules that do not reflect true value, but instead reflect panic pricing.

The reality is that mark-to-market has led economy into a downward spiral. With each forced liquidation every institution holding that security has to take further write-downs irrespective of the underlying cash flows associated with the security. This is an undeniable empirical fact. At no time in history would our banking system been able to withstand mark-to-market accounting at a time of system wide forced liquidations. When there is an extreme imbalance between buyers and sellers, underlying cash flows and asset values are not reflected in the market price. The efficient market theory does not hold up to the vagaries, insecurities and panic emotions that human beings are beholden to.

It is clear that mark-to-market accounting did not consider the impact of forced selling and panic on the “book value” and hence the various bank and insurance company capital ratios. This oversight combined with unfettered naked “down force” short selling, based on understanding mark-to-market accounting combined with the impact of human emotion, ratings agencies and counter party risk avoidance can lead to a panic. As prices decline and ratings agencies downgrade the downward spiral is irreversible. This is because the market has lost faith in the SEC’s ability to govern the markets and no one wants to put capital at risk when they are virtually assured that the deadly combination of mark-to-market accounting and short selling can only lead to further price declines. This will lead to yet further forced liquidations at fire sale prices of illiquid securities. Ultimately the result will be that every financial institution will be “mark-to-market insolvent”.

The argument that every asset should be valued for what it can demand on the open market at a moment in time doesn’t make any sense. Have all financial instruments (stocks, bonds, etc.) underlying value actually changed by 5 and 7 % per day? This is not truly reflective of underlying value. This is reflective of panic and lack of trust in the systems ability to protect the investing public.

When there is fear and panic, those that are forced to sell at fire sale prices will only beget more panic as other institutions have to mark-to-market. This isn’t theory, this is reality, we have witnessed it. Ignoring reality and falling back on efficient market theory reflects complete ignorance to the social science side of economics.

It may already be too late to stop our entire financial system from slipping into a very long and painful depression. I pray you take immediate action.

Time for the SEC and the AICPA to stop being driven by academics and hedge funds. Start looking at what is going on and protect the US economy from a complete meltdown. (again I’m afraid it might be too late).

Note that any temporary rebound in the stock and debt markets are not a sign that changes aren’t required. Mark–to-panic will never result in a healthy financial system.

It is critical that action is taken immediately. 90 days to consider the impact of mark-to-market could be too late, it may already be. Please don’t wait and watch as Rome burns. A healthy functioning stock and debt markets is critical. You must move to restore trust to investors, again I hope it isn’t too late.

Thank you for your consideration.


Chris Lane