Reply to fellow classmate discussion

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Business Finance

I need a reply to the following discussion post. Needs to have an in-text citation and should be approximately 2 paragraphs with an open-ended question to my fellow student. This does not need a title page, and one reference is sufficient. Please make sure there is an open-ended question at the end.

Supporting material: Attached

Question: To prepare for this discussion, please go the case that you read for this week, “Subprime Crisis and Fair-Value Accounting,” and review it again before you answer the following:

Do you agree or disagree with the arguments of critics from the ‘Subprime’ case that fair-value accounting contributed to and exacerbated the recent financial crisis?

Should the Financial Accounting Standards Board (FASB) reconsider its move towards fair-value accounting?

Need a reply to this student:

Reply to Heather!

I agree with the critics from the ‘Subprime’ case that fair-value accounting contributed to and exacerbated the recent financial crisis. Lower-income families being able to “obtain mortgages that had previously been unattainable” and “some loans required less documentation than was traditionally demanded” (Healy, Palepu, and Serafeim, 2009, p.3) resulted in families purchasing mortgages that they simply could not afford. Personally, I know a family that was affected by this crisis. A $300,000 mortgage was granted to a fixed income individual. The monthly payments were $3,065 per month, and the individual received $1,600 a month for social security. Because income verification wasn’t requested, the applicant disclosed making much more, allowing the mortgage to be approved, and eventually, landing in foreclosure. If the FASB does not reconsider its move toward fair-value accounting, there will still be an exception to “ignore so called ‘distress sales’ in assessing fair value” (Norris, 2009) continuing allowance for misleading figures. Norris continues, arguing, “If the banking regulators wan tto allow banks to use different rules in calculating capital–rules that would not requuire marking down assets, for example– then they can do so without depriving investors of important information.” The only reason the crisis was salvageable to some borrowers was when “President Bush announced a limited bailout of U.S. homeowners unable to pay the rising costs of their debts” , which could have been avoidable if “fair-value accounting [was not utilized] in distressed markets”(Palepu, and Serafeim, 2009, p. 9). It seems rather plain and simple, you simply cannot trust that the numbers presented in fair-value accounting are accurate.

References:

Healy, P. M., Palepu, K. G., & Serafeim, G. (2009, August 5). Subprime crisis and fair-value accounting. HBP No. 9-109-031. Boston, MA: Harvard Business School Publishing.

Norris, F. (2009, Sep 11). Accountants misled us into crisis. New York Times, B1.