Transparency is fair game for the banks

Last week’s attack on fair value rules by Swiss Holdings director Peter
Baumgartner would appear for the uninitiated in this long-running debate to
suggest growing opposition in banking circles.

But recent opinions suggest otherwise, indicating somewhat of a sea change
with pro fair value voices now starting to make the headlines.

Investment bank
Goldman Sachs this
week said it ‘regards mark to market accounting as fairer and more sensible than
the alternatives’.

Goldman Sachs’ report in favour of fair value comes hot on the heels of the
bank’s threat to withdraw its membership of the International Institute of
Finance. This came about after the IIF proposed scrapping the IASB’s fair value
policies in favour of valuing illiquid assets using historical, rather than
market prices, because its members were facing such huge writedowns stemming
from the credit crisis.

Goldman Sachs dubbed the proposals as ‘Alice in Wonderland accounting’.

In its latest research the bank goes on to say ‘it is not very credible for
financial institutions to argue that marking to market is inappropriate only
during downturns.’

It adds: ‘If financial institutions apply fair value accounting rigorously,
they should also be able to apply appropriate risk management techniques and
rigour to their capital usage, and this should further help to limit their
exposure to over-valued assets.’

This must come as a boon to standard setters at the IASB. Not that chairman
Sir David Tweedie ever had any intention of backing down, but it must ease the
pressure on the standard setter in regard to fair value. Sir David is nothing if
not tenacious.

Baumgartner trotted out the now common criticism that ‘financial reporting is
not reflecting business reality in many areas’.

Now the debate has shifted, the IASB, in conciliatory mode, has formed an
expert advisory panel – which meets privately but provides a summary in IASB
board meetings – to draft guidance on how to value assets in illiquid markets,
which is what institutions are struggling with. Guidance is expected to be
issued by September.

This week Yoshimi Watanabe, Japan’s minister for financial services, added
weight to the acceptance of increased transparency when he said the experience
of Japan’s banking sector could teach many lessons to the City and Wall Street
as they struggle to cope with the credit crisis.

‘The right tools were needed to establish the true value of assets, rather
than [doing what Japan did] and avoiding ever facing up to the problem,’ said

The banks that remain staunchly against fair value, and there are still many,
are unlikely to win this fight, especially now that the credit crunch is looking
more and more likely to turn into a recession. People want more transparency,
not less.

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