Understanding the mark-to-market meltdown
New accounting rules designed to improve transparency and disclosure were bound to increase noise on financial institutions’ balance sheets. But now they are adding to the credit crunch.
| The accounting farce that’s gone beyond
INSURANCE GROUP AIG, UK mortgage lender Bradford & Bingley, and wealth manager and investment bank Credit Suisse would at first glance have little in common except that they fall under the broad bracket of ‘financial institutions’.
But in the space of a few days in February, the firms found themselves in similar – and uncomfortable – situations.
First, Bradford & Bingley’s management – already fending off speculation that it would be the next UK lender to fail after Northern Rock – announced write-downs of more than £250 million ($500 million) on a range of SIVs, CDOs and hedging instruments. It made it clear that it did not agree with the accounting treatment of these securities insisted upon by its auditor.
Then AIG raised estimated losses on mortgage-related instruments from $1 billion to $5 billion. PricewaterhouseCoopers claimed that there was a "material weakness" in the way that the insurer valued its exposure.