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.
[display_podcast] Accountants to the Rescue (or Not)

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