FAS 157 deals with defining fair value and establishing a framework for measuring fv.
Credit reserves (provisions) are created if the entity FV is lower than carrying value. I am keeping it very generic here.
What this article talks bout is - having reserve capital (to start off with) to issue/create OTC derivatives. Ppl in AIG and their likes, issued tons of CDS's with no capital backing hoping that none of it would get triggered. Of course, we all know what happend to them now!
Isn't this similar to what FAS157 already requires, except assuming default probability is 100%? Companies already complain about credit reserves at the levels they are now, and this is just going to tie up even more capital. I don't get how this is practical.
If you have made mistakes, there is always another chance for you. You may have a fresh start any moment you choose, for this thing we call "failure" is not the falling down, but the staying down.