The StranglersI'm concerned that accountants (and I am one) have played a significant role in the current crisis. Fair value accounting has become the norm in the last few years. The underlying assumption was that market value (mark-to-market or MTM) and fair value are pretty much the same thing.
Maybe in stable markets, but not at the moment. Is the "fair value" of oil $147 or $90? We've seen both in the last 2 months. Do market prices of ABS reflect the amount investors are likely to get back over time? Fitch did an exercise in stress-testing Irish RMBS a couple of months ago. They assumed in their "severe" case 9% defaults and 40% market value declines-but not only did the AAA bonds not default, they were not even downgraded.
Nonetheless, banks holding such assets have to take MTM "losses" through their P+L accounts, which reduces their capital base and destabilises their position in the market, contributing to the current panic. $500bn+ has been written off as losses by banks already. Does this really reflect what is likely to be lost over time, or is it just a function of a febrile market? There's much to be said in favour of old-fashioned historic cost less reserves accounting in times such as these.
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