New Bond Math: -2 + -2 = 4
Bloomberg blames Wall Street for using FASB 159 [mandatory] rule ! Blame the beancounters instead.
Leave it to Wall Street to profit from its own distress.
Merrill Lynch & Co., Citigroup Inc. and four other U.S. financial companies have used an accounting rule adopted last year to book almost $12 billion of revenue after a decline in prices of their own bonds. The rule, intended to expand the “mark-to- market” accounting that banks use to record profits or losses on trading assets, allows them to report gains when market prices for their liabilities fall.
The new math, while legal, defies common sense. Merrill, the third-biggest U.S. securities firm, added $4 billion of revenue during the past three quarters as the market value of its debt fell. That was the result of higher yields demanded by investors spooked by the New York-based company’s $37 billion of writedowns from assets hurt by the collapse of the subprime mortgage market.
“They can post substantial gains as a result of a decline in their own creditworthiness,” said James Cataldo, a former director of treasury risk management for the Federal Home Loan Bank of Boston and now an assistant professor of accounting at Suffolk University in Boston. “It’s completely legitimate, but it doesn’t make sense by any way we currently have of thinking of net income.”
Bloomberg: Wall Street Says -2 + -2 = 4 as Liabilities Get New Bond Math
June 2nd, 2008 at 10:13 am
Mark-to-market the assets? Why not mark-to-market the liabilities? They make it sound like these guys are making a killing if their creditworthiness deteriorates, when in actuality, it’s more than offset by losses elsewhere.
June 2nd, 2008 at 10:42 am
exactly, I don’t see anything wrong with this rule, if the assets have to MtM then it’s only common sense that the liabilities should also be.
June 2nd, 2008 at 11:39 pm
It makes no sense at all. Just because you $100 million in liabilities is trading for $50mn, that doesn’t mean you’ve earned $50mn, since they would NOT be trading at that level if you could buy them, and if you can’t buy them, you still owe $100mn.