Capital Markets

Investment Pros Like Bailout, Fair Value

Most support Treasury's bailout proposal and think fair-value accounting should not be suspended, the CFA Institute finds.
Alan RappeportSeptember 26, 2008

Investment professionals overwhelmingly support the government bailout package proposed by the U.S. Treasury and reject calls for a suspension of fair-value accounting.

In a survey of 3,130 investment professionals by the CFA Institute, 66 percent were in favor of bailing out the financial-services industry and considered it the best alternative to a serious economic crisis. The specific plan to create a $700 billion liquidity pool using taxpayer funds to buy the illiquid subprime, mortgage, and other derivative securities from the troubled financial firms drew support from 60 percent of those who answered.

“The support for the bailout likely reflects the belief of our professional members that our policy makers, being closer to the underlying data, are doing what is needed to provide systemwide stability,” says Jeff Diermeier, president and CEO of the institute.

Diermeier notes that although there is strong support among investment professionals for government action, accountability for the current situation remains important. Three-quarters of those polled said a bailout package should include limits or oversight on executive compensation for firms accessing the liquidity pool.

The survey also probed the issue of fair-value accounting, which came up during testimony at this week’s Senate Banking Committee hearing. Federal Reserve chairman Ben Bernanke said that suspending the rule, which was encouraging assets to be sold at “fire sale” prices, would be harmful to investors.

Those queried by the institute, an industry group for chartered financial analysts, tended to agree with Bernanke’s sentiment. Among those polled, 73 percent said requirements for fair-value accounting should not be suspended to allow firms to avoid writing down the value of derivatives to a current market value. And 74 percent said the government should not pay a value other than fair value for the illiquid subprime, mortgage, and other derivative securities.

One CFA respondent said anonymously, “The system must maintain its integrity and as such, an ‘honest’ price must be employed. This implies deeply discounted prices; more so than the banks have reflected on their balance sheets.”

But not every move by the government has been hailed. A majority of respondents did not support the Securities and Exchange Commission’s decision to temporarily ban short-selling on a broad range of financial-related stocks. Of those who responded, 55 percent said that was a bad idea, and 63 percent said an “up-tick” rule would be a better solution.

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