The SEC's latest clarifications on fair-value measurement rules give banks and other financial firms substantial wiggle room in valuing assets like collateralized debt obligations and subprime mortgage-backed securities. The upshot is that firms can mark their securities substantially higher than could be otherwise supported by indicative broker quotes or independent pricing services. Firms can also ignore any prices from recent transactions in these securities if, in management's judgment, they reflect distressed or disorderly sales.

Which numbers should trading counterparties and public investors believe: management's higher-than-market valuations or independently produced valuations, some of which are based upon observed transactions? And why does it matter which marks are used?

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