Financial heavyweights defend fair value

Three pre-eminent economic thinkers have penned a strident defense of fair
value accounting, arguing that markets need valid information to function at
their best.

Robert Merton, 1997 Nobel laureate in economics; Robert Kaplan, professor at
Harvard Business School; and Scott Richard, professor at the Wharton School of
the University of Pennsylvania, have staked their ground in support of
fair-value in an opinion piece published in today’s Financial Times.

The trio said while regulators, legislators and banks may be inclined to
adopt `simple solutions,’ to complex financial issues, the market will
ultimately benefit from more transparent information.

`While regulators and legislators are keen to find simple solutions to
complex problems, allowing financial institutions to ignore market transactions
is a bad idea,’ the three said.

`Markets function best when companies disclose valid information about the
values of their assets and future cash flows. If companies choose not to
disclose their best estimates of the fair values of their assets, market
participants will make their own judgments about future cash flows and subtract
a risk premium for non-disclosure.’

The three argued that fair value’s credibility depended on external
validation by external auditors.

They also said that it was bad policy to allow accounting rules to `mislead’

`Legislators and regulators fear that marking banks’ assets down to
fair-value estimates will trigger automatic actions as capital ratios
deteriorate. But using accounting rules to mislead regulators with inaccurate
information is a poor policy,’ the three said.

Read the full piece:
the fair value of complex securities

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