Lessons from the financial crisis | 83 comments (83 topical, 0 editorial, 0 hidden)

Re: Lessons from the financial crisis (none / 0)

Incidentally, if I remember my accounting class right, in the Danish version of reality you have to book the full expected value of your contingent liabilities.

Either

that is inconsistent with mark-to-market accounting or equal to it by definition; or
expected value could be zero with a large dispersion in either direction

Regarding 2) suppose you have booked the expected value. You now have a contingent liability and a contingent asset, where only one of the two can be nonzero at any given time. How do you book that?

Economics is politics by other means

by Migeru (migeru at eurotrib dot com) on Thu Apr 21st, 2011 at 04:22:05 PM EST
[ Parent ]

Re: Lessons from the financial crisis (none / 1)

Ad 1) No. Where there exists a secondary market for contingent liabilities, it is permissible to mark them to market, as one would be able to repurchase them at the market discount.

Where there is no secondary market, however, it is not possible to mark to market. Thus no convention can be inconsistent with the mark-to-market convention. Mark-to-market returns NAN, so any valuation convention which is politically palatable may be applied to illiquid liabilities.

"NAN" is not the same as "zero." This last point is the one that seems to have caused some confusion with AIG et al.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sun Apr 24th, 2011 at 07:24:49 PM EST
[ Parent ]

Lessons from the financial crisis | 83 comments (83 topical, 0 editorial, 0 hidden)

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