10th October 2008:

How “fair” is “fair value”?

The issue of “fair value accounting” is both topical and controversial and whilst many would advise me to “keep below the radar” and thus say nothing on this topic I don’t think it is credible to do so.  
 
Earlier today I was asked by a journalist if fair value accounting is to blame for the current financial crisis?  The answer is a resounding “no”.  What is concerning is that the question was asked – and I know it is being asked by many people and not just the journalist I spoke to.  It is bizarre to think that a financial crisis of the magnitude we are now facing could be caused by an accounting rule.  Indeed, I would argue that the accounting rules have helped us understand the scale of the issue.
 
The US, and others, now refer to “toxic assets” yet those arguing we should suspend “fair value accounting” seem to be suggesting that we should value these “toxic assets” at more than they are worth – and that if we change the method of valuation somehow they would no longer be “toxic”.  If only the crisis we now face was that simple to solve.

 Mark to Market  2 Comments October 10th, 2008