...they're in whack

This past week I spoke at First Rate's annual user conference in Arlington, Texas. My topic was GIPS(R) 2010, the new edition of the Global Investment Performance Standards, though we touched on other topics, such as the CIPM exam. When queried about the CIPM, I launched into a rather passionate call for support for the program, suggesting that if you consider yourself a "performance measurement professional" how can you not be pursuing and supporting certification? Performance measurement plays such an important role in our industry, we should champion it however we can.

Jason Zweig's WSJ column this weekend discusses the first quarter's gains and quotes Ted Aronson (of Aronson Johnson Ortiz) who remarked that "valuations aren't out of whack; they're in whack." Valuations, of course, are a fundamental ingredient in the measurement of performance. Part of the problem with the sub-prime mortgage driven crisis which we are making our way out of was the inability to properly value many issues.

I'm about halfway through listening to Gregory Zuckerman's The Greatest Trade Ever, which tells the story of how John Paulson was able to make billions of dollars by shorting the mortgage market. It's a fascinating book which delves into both the personalities of the various players as well as the investments which were made. That market experience has, of course, brought to the surface questions about models and the various risk measures, such as Value at Risk, which were being used.

How can these activities not further strengthen the value that our industry provides? Performance measurement remains a critical component of the market. And while we can debate how risk should be measured and managed, there's no doubt that it's not going to go away. We're in an exciting segment that will continue to be a fascinating and exciting one for many years to come.

Fair value

I just saw a story a Bloomberg regarding Nobel Laureates Myron Scholes and Robert Merton's call for more accurate valuations on illiquid securities (http://www.bloomberg.com/apps/news?pid=20601109&sid=aiVPT2XgAgto#).

The problems with these assets came to a head last year when many holders of subprime mortgages had them on their books at inflated prices, but given their lack of liquidity had a challenge when trying to value them at more realistic prices. Last year Massachusetts Representative and chair of the House Committee on Financial Services, Barney Frank, suggested that institutions offer two prices: the listed one and what they thought was the more realistic one. I actually found this suggestion as having some merit, though implementing it would no doubt be quite difficult (from both accounting as well as procedural perspectives).

Whether FASB has the answers or not is unclear to me, but I suspect many firms would like guidance in this area.