Remember back in June when David Einhorn went after Lehman Brothers, the bank whose sudden deflation stunned Wall Street this month? Now it’s the hedge fund industry’s turn to come under scrutiny. Einhorn, who manages Greenlight Capital, a $6 billion, New York–based hedge fund firm, zeroed in on how Lehman was valuing so-called Level III assets — illiquid and hard-to-value holdings like loans to troubled real estate developers, for instance. Under FAS 157, a new accounting rule that sets a fair-value measurement standard, financial entities must now separate their assets into three categories (from Level I, the most liquid and easiest to value, to Level III). The rule also requires firms to document how they calculate valuations. It’s no longer enough, in other words, to say something is worth what you paid for it and call it a day. FAS 157 doesn’t force write-downs, but it does enable investors to press for more details — as Einhorn did with Lehman. Unlike publicly traded institutions, however, most hedge funds will not have to produce financials under the new guidelines until after the end of this year. Michael Patanella, a New York–based partner with accounting firm Grant Thornton, believes that the sooner FAS 157 comes into play, the better. “Given the environment we are in,” Patanella says, “I think investors want to know how these assets are being valued.”
