The primary thesis of this blog series is that assessing fair market value in bankruptcy must now account for general economic conditions, due to Federal Reserve distortions of fair market value through unlimited monetary expansion and the unavoidable influence of global derivatives trading markets.
In Part 1 and Part 2 we addressed the mechanisms of value distortion due to Fed policy and the derivatives trading markets. Yet even with these distortions of fair market value, the standard valuation models used in bankruptcy courts and other civil courts should continue to work reasonably well, provided valuation experts and courts adapt the valuation models to more fully account for general economic conditions. Continue reading “FMV PART 4: FAIR MARKET VALUE IN BANKRUPTCY”
The concept of fair market value is central to bankruptcy asset valuations. As such, bankruptcy asset valuation methods affect every part of the reorganization or liquidation process.
REVIEW OF VALUATION BASICS
As per the authoritative bankruptcy valuation paper, “Valuation Methodologies: a Judge’s View by US Bankruptcy Judge Christopher S. Sontchi (Chief Judge, D.Delaware), a company and/or its assets can be valued in one of four ways (as paraphrased in this section, below):
1. Estimation of current asset values, typically using liquidation value or replacement value;
2. Discount of expected cash flows (DCF);
3. Relative value analysis of comparable companies / assets; and
4. Contingent event assessment. Continue reading “FMV PART 3: BANKRUPTCY ASSET VALUATION METHODS”
The core cause of the financial crisis of 2008, and again today in 2020, has been the dangerous impact of derivatives markets created by large banks, insurance companies and hedge funds. Speculative trading practices by large banks were outlawed in this country under the Glass-Stegal Act of 1935. But in 1999, at the end of the Clinton Administration, Glass-Stegal was repealed. This repeal, along with passage of the Commodity Futures Modernization Act), during the Bush II administration, opened the door for massive speculative trades in complex derivative instruments.
To be sure, in 2009, the Dodd-Frank Wall Street Reform Act attempted to regulate credit default swaps to a degree. But in response, US banks and hedge funds shifted speculative derivatives trading overseas, and then lobbied congress to limit meaningful regulatory enforcement of Dodd-Frank, the “Volker Rule.” As a result, speculative trading in the global derivatives markets has continued relatively unabated to this day.
In recent years, famed investor Warren Buffett pulled no punches in calling speculative derivatives “weapons of mass destruction.” In his 2017 letter to shareholders, Mr. Buffett explained: Continue reading “FMV PART 2: IMPACT OF DERIVATIVES MARKETS”
Our legal system depends on accurate assessments of fair market value in virtually every business-related matter that comes before a court. Distortions of fair market value, from whatever source, are problematic. Valuation issues materially affect everything from real estate values to stock and commodity values to more esoteric valuations involving crop prices for farmers.
Fair Market Value
As every business student learns, FMV is the price at which a willing seller and a willing buyer will close a transaction. Until about 2008, the centuries-old assumptions of fair market value more or less held throughout our economic system. After 2008, the validity of “fair market” value began to erode in certain securities markets supported by the various Congressional bailouts and Federal Reserve liquidity injections. After all, if the Federal Reserve is fully committed to supporting securities markets at any cost, that means the the Fed can, and does, unilaterally set the market price of assets it is willing to purchase. Invariably, this causes distortions of fair market value. Continue reading “FMV PART 1: DISTORTIONS OF FAIR MARKET VALUE”