Fair value accounting is under increasing pressure as losses on writedowns tighten the credit markets further
According to the International Monetary Fund, global losses from writedowns of non-performing or poorly performing financial instruments are likely to reach $1.4 trillion. Around $560bn of write-offs have been announced so far (as of the end of September), which leaves hundreds of billions yet to be declared. With that volume of downside lurking somewhere in the system, it’s no wonder banks remain distrustful of each other, surpressing credit market activity. And with more pain to come it is not surprising pressure remains over the use of fair value in accounting for financial instruments.
Former Lehman Brothers CEO Richard Fuld told Congress that fair value accounting rules forced the bank to write down its assets and that that was one of the reasons for the bank’s collapse.
It seems that US politicians had some sympathy with Fuld on that. Section 132 of the Emergency Economic Stabilization Act (EESA), the $700bn US bailout legislation which was passed into law at the beginning of October, allows the Securities & Exchange Commission to suspend the controversial mark-to-market rules.
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