The rule expanded the daily marking of banks' trading assets to their liabilities, under the theory that a profit would be realized if the debt were bought back at a discount. Accounting `Abomination' In practice, it's an accounting "abomination" because fluctuations in the value of the debt don't change the amount the banks owe
Accounting `Abomination'
In practice, it's an accounting "abomination" because fluctuations in the value of the debt don't change the amount the banks owe
Remember that, in the aftermath of Lehman Brothers' collapse, there was a puch to relax/suspend mark-to-market rules.
That is, when the market is bubbly, mark-to-market allows the booking of unrealised trading profits, and that's a good thing for people on bonuses.
But when the market sours, mark-to-market requires booking unrealised losses, which is a bad thing for people on bonuses.
And then when credit sours, mark-to-market allows booking unrealised profits from counterfactual debt buybacks, which is again good for the bottom line.
I think it's not so much that these are accounting abominations but that accounting is itself an abomination because it was created in the days of fixed income streams and constant interest rates and is wholly unprepared to deal with fluctuating markets in a sensible way. By laying out pros and cons we risk inducing people to join the debate, and losing control of a process that only we fully understand. - Alan Greenspan
The scandal, WTF-ery and double-taking comes about when the same rules are applied to their own obligations, whereby if your credit deteriorates you book a profit and if it improves you book a loss.
But, of course, tweaking accounting rules in good times to overstate the upside and in bad times to understate the downside is, apparently, par for the course. There wasn't a lot of outrage when the US Congress debated relaxing mark-to-market rules in late 2008... By laying out pros and cons we risk inducing people to join the debate, and losing control of a process that only we fully understand. - Alan Greenspan
There wasn't a lot of outrage...
The ignorance stems from them trying to talk about it from that "common sense" and "Appeal to Authority" stance we were talking about the other day?
But I really don't know.
That is obvious every time you see a commenter asking for advice on his 401(k)... By laying out pros and cons we risk inducing people to join the debate, and losing control of a process that only we fully understand. - Alan Greenspan
Step back for a moment.
Bonus pools are skimmed from revenue, are they not?
Let's be clear that the alleged defects or refinement of rules requiring estimation of market prices pertain to quality of information needed to approve a firm's credit application, not its actual operating performance. And perhaps what offends you most of all is, the representation of operating performance suggested by imaginary transactions --events which have not occurred-- rather than the realized gain (retired debt) in unobligated income or loss (asset "write down") attributed to repayments of historical cost, "buys" at market rate, or defaults which have occurred.
Mr Young [believed] that most [financial statement] users do not expect revaluation of the entity's securities (which are part of an entity's overall capital structure) to be a component of operating performance. In his view, the changes in the entity's overall capital structure (both debt capital and equity capital), particularly from the effect of changes in the entity's own creditworthiness, should not be reflected in business performance. Recognizing changes in an entity's own creditworthiness in earnings could mislead users and potentially represent or conceal operating performance issues. At a minimum, eligibility criteria should be required when the fair value option is elected for the debt portion of an entity's capital structure. [2007: 25]
820 would correct valuation errors allowed by 159 that permit firm accountants to discriminate cash equivalence and selection of certain classes of assets and assumptions about future operating conditions and income.
820 would force firm accountants to disclose data inputs to an estimated the value of securities, promissory notes and outstanding coupons as if the market price less historical cost of each instrument represented cash equivalent value in sum of the going concern if liquidated a/k/a its book value. Well, that's debatable. But there you have the solution to the problem of financing firms ever on the verge of insolvency.
At least 820 attempts to harmonize, or standardize, mark-to-model methodologies. That is a good thing.
Let's not lose sight of the so-called paralysis that seized the capital market because prospective traders lost "confidence" in the "liquidity" of each other's financial instruments for sale or pledged for collateral. The quality of that information is as important to prospective creditors as realized profit (loss) over a reporting period.
How else do you propose to evaluate the cash equivalence of financial instruments which comprise the manufacture and inventory of financial services firms? Diversity is the key to economic and political evolution.
I think it's not so much that these are accounting abominations but that accounting is itself an abomination because it was created in the days of fixed income streams and constant interest rates and is wholly unprepared to deal with fluctuating markets in a sensible way.
Anyway, accounting is an abomination. Exhibit A: off-balance-sheet items. Exhibit B: contingent liabilities. Exhibit C: loss of control enabling repo 105. Exhibit D: "Goodwill", that is, "intangible assets". By laying out pros and cons we risk inducing people to join the debate, and losing control of a process that only we fully understand. - Alan Greenspan
