Blackstone founder slams fair value

The co-founder of private equity group Blackstone has blasted the fair value
accounting rule for the collapse of the financial markets.

Stephen Schwarzmann is convinced that fair value has forced accountants to
overstate the problems at the largest US banks.

‘From the C.E.O.’s I talk with, the rule is accentuating and amplifying
potential losses. It’s a significant contributing factor,’ Schwarzmann told the
New York Times.

Fair value caused Citgroup to write down $5.9bn (£2.9bn) while Merrill Lynch
was forced to write down $8.4bn (£4.2bn).

Standard setters say the rule forces banks to use market values for assets
instead of internal models, which leave room for manipulation.

But problems arise when there is no trading floor or market for assets. In
such cases assets are marked down to zero.

Schwarzmann says this is wreaking havoc on the financial system and is one of
several figures campaigning in Washington to change the rule.

Citigroup’s head of accounting policy Bob Traficanti said that the bank had
‘securities with little or no credit deterioration, and we’re being forced to
mark these down to values that we think are unrealistically low.’

But fair value supporters say that if Schwarzmann and others get their way,
companies may mark-to-market when it suits them and look the other way when it
doesn’t.

Further reading:

US
watchdog begins fair value education drive

SEC announces fair value roundtable

Bonderman slams fair value