Goldman Cries Foul on IIF Fair Value Proposals
Leading financial institutions reeling from writedowns of damaged debt assets want relief from “fair value” accounting. But Goldman Sachs (NYSE: GS) does not agree and may even pull out of the group that proposed the relaxation.
The Financial Times reports Goldman said it was likely to sever its links with the Institute of International Finance after the association of leading banks and insurance companies called for a relaxation of controversial accounting rules on asset valuation.
Goldman, one of the IIF’s 370-plus members, said it did not agree with the IIF’s proposals, which have been circulated to regulators and politicians over the past month, and opposed any changes in “fair value” accounting.
The proposals are extraordinary…This is Alice-in-Wonderland accounting. - Goldman Sachs official.
Morgan Stanley said it also agreed with the principle of “fair value” accounting but had not yet decided whether to leave the IIF following its proposals.
Under the IIF plan, banks would be allowed to use historical, rather than market prices, to value illiquid assets – a change that could help to reduce the negative impact of the crisis on their strained balance sheets.
“Often dramatic writedowns of sound investments required under the current implementation of fair-value accounting adversely affect market sentiment, in turn leading to further writedowns…in a downward spiral that may lead to large-scale fire sales of assets,” the IIF’s draft paper argues.
Ian Mackintosh, chairman of the UK’s Accounting Standards Board is leery of changes:
We know it is difficult to assess fair value in illiquid markets, but I would be surprised if the IASB decided there were any circumstances where financial instruments should instead be reported at cost.
The IIF may have the Bank of England in its corner. As reported on Research Recap, the Bank thinks strict application of fair value accounting may overstate subprime-related losses. Oxford Analytica does not agree: “it is debatable whether current pricing methods have led to excessively depressed ABS valuations.”
Mark-to-market pricing, or ‘fair value’ accounting, is strongly endorsed by the accounting profession.”
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