Subject: File No. 4-573
From: Gilbert F. Viets

December 26, 2008

RE: File No. 4-573
Accounting formerly confined itself to conservative principles, one of which is lower of cost or market accounting. Where a higher market existed, market value was disclosed for informational purposes. But, reported net worth of an entity was based on an entities actual transactions, not someone elses transactions.

Lower of cost or market leaves a mystery for investors: What makes up the difference between recorded book value and market capitalization? It is a healthy mystery for investors, providing a check and balance. The mystery invokes earnings and book multiples for investors to evaluate. Cost is the base of thought, with the buyers deciding how much more or less to pay. It is a good exercise for the market.

The conservative system has principles within which to operate., the fewer the better. It works but has always been the target of those not wanting to be bound by consistent principles. Their pressure led the American Institute of Certified Public Accountants and the Public Company Accounting Oversight Board to acquiesce to big and small company differences for the same situations.

An ideal world for those wanting fair value reporting would have book value and market value the same. Mark to market accounting would eliminate book value multiples. Future earnings would be booked. There would be theoretically one correct formula, and one correct discount rate at which to measure future earnings and cash flow. Auditors would give a clean opinion on its application to financial reports. The mystery of the market would be gone. Adam Smith would be proud of us.

Unfortunately, mark to market will get us in deep trouble. It has. A short list of whys, follows.

1. Markets are based on transactions at the margin, the margin being the edge of the population of holders and those wishing to be holders. If the universe of units (shares of stock, cars, houses, movie tickets, bread) all had to be transferred at any one point in time, the market would be quite different. Valuing the universe at the margin is fantasy.
2 Modeled market values are suspect. Anyone who has read valuation reports knows the wide latitude of decisions from which the evaluator gets to choose. The old MAI (Made as Instructed) joke comes up whenever such reports are read.
3. Financial statements of companies are frequently wrong, embedding and frequently magnifying the errors in financial statements of entities who hold securities of companies whose statements are wrong.
4. Mark to market lowers professional standards, providing cover for inadequate checking and regulating.
Auditors and regulators like mark to market. They can hide many deficiencies behind market value, blaming investors for lack of diligence, rather then letting investors blame them for not doing their job. Accounting firms can develop their valuation services, a service for which they get to limit liability.

Extend no sympathy to those institutions wanting relief from the downside of mark to market. The same institutions now arguing for moderation of mark to market accounting, were the first to argue for mark to market accounting when market values were high. Greed caused these institutions to misuse unearned, unreal capital. They believed, or pretended to believe, markets only go up. They really want higher of cost or market accounting, the worst answer of all.

It is unlikely the current situation will get better in a short period of time. Orderly liquidation of bad loans over three to four months or three to four years, is not going to make values return to what was reported as fair value last year. Too many bad loans were just bad loans with bad securitized market values. There is no reason to pretend, or report, any different, whatever accounting we choose.

There is no reason to continue bad accounting that got us here.