This is an excerpt from Bedrock Group’s latest newsletter:
...We feel like expanding our witch-hunt of last week; We had pointed our finger at Basel (II)
and now point it at the accounting rules- FASB115 in particular, the one that sets the rules for
mark-to-market. Whilst written in good faith in what had been reasonably good and stable
times, it simply wrecks havoc in times such as these! How can we mark-to-market when
there is no market?
Here are some aberrations which occur: A bank holds perfectly good bonds which pay their
interest regularly, never missing a beat. These are held in a category “Available For Sale”.
Normally, these are held at cost or market, the lower of the two. The diligent
accountants/auditors check for valuation and get indicated bids at $0.60 so the Bank is
forced to mark-down these perfectly good securities by 40%. This markdown does not pass
through the Profit & Loss accounts, but does hit the company’s equity. So we could see a
bank with a positive P&L and then a huge impairment of capital. The operation is fine, the
stock is destroyed based on the collapsed book-value.
It may make sense in the semi virtual world of banks, but let’s extrapolate to an airline: They
bought a 747 Boeing for say $400 million two years ago. The plane flies well, with reasonable
occupancy and generates a positive cash-flow. Now, the company’s Auditor reads that
airplane prices have co......................
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