The bottom line from the chair of the International Standards Board is that the European banks are fudging their books. This is not the Blogs making this assertion. It’s coming from the highest authority that exists.
That’s supposed to be illegal if you do business here in the US, and many of these institutions do in one form or another. Some are even primary dealers.
This is NOT just an intrepid blogger or three making this assertion. It is IFRS, the highest authority there is in this regard.
Even when a model is used to measure fair value, that model must reflect current market conditions (including those as evidenced by observable transaction prices) and it should include appropriate adjustments that market participants would make for credit and liquidity risks. (ed: If there are liquidity risks the mark would be lower to reflect those risks, not higher) Furthermore, the model must maximise the use of relevant observable inputs (eg market data) and minimise the use of unobservable inputs (eg the company’s own assumptions). A company cannot ignore relevant market data (including observable transaction prices) when it is clear that market participants would use that data in determining the price at which they would be willing to enter into a transaction for the financial asset.
It would therefore not be in accordance with either the requirements in, or the intent of, IAS 39 to measure a loss on government bonds classified as AFS financial assets solely by assessing the present value of the future cash flows arising from a proposed restructure of those bonds. It is hard to imagine that there are buyers willing to buy those bonds at the prices indicated by the valuation models being used. In my view it is therefore difficult to justify that those models would meet the objective of a fair value measurement.
That’s from August, by the same organization – and now it has been repeated, in public.
The DAX was pounded for 2.5% today and our market was down a similar amount. Banks were the big suffers, with Morgan Stanley being hit particularly hard.
If this game is not stopped by someone – either the participants themselves or regulators – we are headed directly for a repeat of 2008’s meltdown and this time there is little or no government ability to interrupt it as the tactic of allowing firms to lie about valuations – the very tactic that interrupted the crash in early 2009 – has already been used!
The lies must stop NOW.
H/t Bruce Krasting