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14 fevereiro 2008

Valor justo e crise financeira

A crise financeira atual pode ser um teste para a contabilidade pelo valor justo. É o que afirma John Plender, colunista do Financial Times. A questão da dificuldade de avaliação, os atritos entre auditores e administração e a volatilidade dos lucros são lembrados.

Financial crisis presents a test for fair value accounting.
By JOHN PLENDER
Financial Times - 13/02/2008 - Asia Ed1 - Page 22

Is fair value accounting a blessing or a curse in a financial crisis? On the face of it, an approach whereby assets and liabilities are marked to market looks logical when the emphasis of the banking system has shifted from deposit taking and lending to providing credit via securities markets. IOUs can be easier to value than bank loans. And the resulting transparency should be helpful in facilitating transactions at times of heightened risk and low confidence.

That is precisely what is needed now, when markets in complex pieces of paper have seized up. For if assets can be priced realistically, trading can resume. Yet in practice, fair value accounting appears not to be delivering on its promise to help mitigate systemic risk. The problem arises over illiquid assets.

The US Financial Accounting Standards Board has introduced a "three bucket" taxonomy to categorise marks to market. Bucket number one is for assets that have observable market prices. Bucket number two is for less frequently traded securities that can be priced by reference to similar assets. Bucket three is for the dregs - assets with "unobservable inputs" where value is based on management assumptions. A great deal of recent credit market innovation is dumped here.

Because of the subjective nature of this last category, the scope for friction between management and auditors at the end of the year is great. The risk is that auditors, worried about their liability, will bludgeon management into adopting assumptions that are close to fire sale valuations. Yet if assets are marked down excessively, the solvency of the financial system could be eroded. Regulators are nonetheless egging on auditors, adding to the pro-cyclical impetus in an already extreme downturn.

A consequence is that earnings volatility is being increased substantially - witness the recent numbers from MBIA, the monoline insurer. Marking financial instruments to market threw up a pre-tax loss of Dollars 3.5bn. Yet MBIA expects to incur actual losses of only Dollars 200m of this, believing that the bulk of the loss will reverse over the life of the insured credit derivatives.

As Christopher Whalen of Institutional Risk Analytics points out, bond insurance is not like a credit default swap contract, where the obligor must immediately compensate the covered party for the full principal amount of the loss. It merely requires the underwriter to guarantee timely interest payments and the eventual payment of principal on maturity, which may be years later.

Fair value, then, is swings and roundabout accounting. It is also remote from cash. And because it requires liabilities to be revalued as well as assets, a decline in the creditworthiness of a bank can, bizarrely, throw up profits.

It used not to be like this. In the Latin American debt crisis of the 1980s, the world's biggest banks would have been insolvent if their loan books had been valued realistically. But to stave off runs on banks by uninsured wholesale depositors in the protracted period needed to rebuild bank capital, the authorities allowed loans to remain at book value on bank balance sheets.

Provisioning against loans was progressive, permitting capital ratios to be maintained. The auditors played along with the fudge. They did the same in relation to property values in the British fringe banking crisis of the 1970s.

This policy of regulatory forbearance would theoretically be possible today. Illiquid assets that are now plopping into the accountants' third bucket could be kept on bank balance sheets at book value until maturity. But forbearance carries the risk of moral hazard.

After the Latin American debt crisis, the banks' depleted credit ratings and higher capital costs gave them a higher cost of funds relative to corporate clients. So the clients went direct to the markets for funds, cutting out the banking middleman.

As securitisation thus became a mainstream phenomenon, the banks had to take bigger risks if they were to grow as shareholders demanded, which sowed the seeds of the next property-related banking crisis.

So there is no perfect solution. Fair value is just another fudge.

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