The subprime crisis that the financial pundits have been talking about for the last two years has seeped beyond Wall Street...
The subprime crisis that the financial pundits have been talking about for the last two years has seeped beyond Wall Street to the point where there is nary a soul on Main Street that is not aware of the situation thanks to the failure of Lehman Brothers, the shuttering of several major banks, and the federal government's historic $700 billion bailout. The stock market has been on a wild roller coaster ride, with 700- point drops followed by increases of nearly 1,000 points, only to be followed by more 700-plus-point drops.
After reviewing the fundamentals of how subprime mortgages and securitization of those high risk loans work, this article turns to the fair value accounting rules that require the use of price quotes from active markets rather than modeling techniques when valuing the mortgage-backed securities that are key to the subprime meltdown. Lastly, the article addresses the responsibility that auditors have to audit and report on the valuation of those securities.
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