Market Value Signal Extraction and the Misapplication of SFAS 133 in the U.S. GSE's

The misapplication of the Statement of Financial Accounting Standards 133 in the U.S. Government-Sponsored Enterprises had obscured the first signals of trouble in mortgage securities. Still, regulators should have detected signals using their market value of equity measure, after statistical modification of related balance sheet accounts. The nonlinearity in this measure would imply that any implementation by management could significantly understate the exposure of portfolio equity to interest rate changes.