Accountants to the Rescue (or Not)

And you thought mark-to-market was our problem.

Recently the Chairman of the International Accounting Board (the IASB) criticized the way some French banks are handling Greek debt on their books. They’ve measured these banks’ accounting for Greek bonds and found it wanting.

Greek debt is trading around 40-50 cents on the dollar. Many banks have written it down to those levels. But some banks didn’t play by the market-to-market rules. BNP Paribas and another French bank only wrote down their holdings by 20%, valuing the debt at the exchange-value of the recent bailout package.

The mark-to-market formula is simple: the market value is the accounting value. This may make sense with highly liquid bonds, but when markets are thin and securities are distressed, markets can mislead, and banks have the option to mark to a model, not to trading levels. After all, there can be many reasons a security trades down, and intrinsic value may only be a minor factor.

So in 2008 the accountants gave the banks some leeway. But it can be controversial: some call it “mark-to-make-believe,” and there’s room for disagreement. Now the head of the IASB has decided “markets know best.” The result is he may torpedo a rescue plan by questioning the accounting his own rules allow.

Makes you wonder if they want to trash the market.
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[display_podcast] Accountants to the Rescue (or Not)

By | 2011-08-31T00:44:08+00:00 August 31st, 2011|Accounting, Global Market Update|0 Comments

About the Author:

Mr. Tengdin is the Chief Investment Officer at Charter Trust Company and author of “The Global Market Update”. The audio version of each post can be heard on radio stations throughout New England every weekday. Mr. Tengdin graduated from Dartmouth College, Magna Cum Laude. He received his Master of Arts from Trinity Divinity School, Magna Cum Laude and received his Chartered Financial Analyst (CFA) designation in 1992. Mr. Tengdin has been managing investment portfolios for over 30 years, working for Bank of Boston, State Street Global Advisors, Citibank – Tunisia, and Banknorth Group. Throughout his career, Mr. Tengdin has emphasized helping clients manage their financial risks in difficult environments where they can profit from investing in diverse assets in diverse settings. - Leave a comment if you have any questions—I read them all! - And Follow me on Twitter @GlobalMarketUpd

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