Monitoring Board

In January 2009, the IASB formed a 'monitoring board' composed of representatives of international regulators. Said board has been fairly quiet but has just said that standards should be 'reliable, relevant, understandable and comparable'. This is an interesting straw in the wind because it reflects the old wording of the IASB conceptual framework, not the proposed new wording, which replaced 'reliable' with 'faithful representation'. Words matter and this was not just a cosmetic change. 'Faithful representation' was seen by some commentators as part of an ongoing trend to move towards fair values.

Another term, another financial crisis

The world seems to be a more stable place than it was a few months ago. The stock market has had a record run in the last quarter, house prices are stabilising, even the pound has stopped falling against the Euro.

Does this mean the financial crisis is over? I doubt it. The public finances are a mess and we can't see any fundamental change to them until after the election. What then? My guess is that whoever wins is going to squeeze public expenditure hard. Universities, inter alia, will be in for a thin time of it. However the size of the cuts needed to reduce borrowing to manageable levels is enormous. The alternative course of action - a rousing bout of inflation - is going to look awfully tempting to whoever wins the election. Index-linked bonds anyone?

The trouble with markets

Roger Martin argues (see title link) that linking managers rewards to share prices (eg with options) gives them an incentive to manage the 'expectations' market rather than the real market for production of goods and services. He fingers efficient markets theory, shareholder value and agency theory as the intellectual culprits and advocates reward based on 'real' performance.

He has a convincing case and a corollary of his argument would be a return to historical cost accounting rather than the use of fair values, which are based on the expectations market.

The unacceptable face of capitalism reborn?

The title link is to a report that hedge funds are buying poor quality corporate debt in order to take over ("loan to own") or liquidate ("loan to bust") the issuing companies. Edward Heath dubbed some of the activites of Tiny Rowland's Lonrho as "the unacceptable face of capitalism". We seem to be seeing that face in a new guise.

Accountants plead for protection

In possibly the least unexpected news item of the year, Accountancy Age reports that the Big 4 are seeking immunity from law suits arising from the credit crunch. Perhaps they should have thought a bit more about the risks their financial clients were running.

Financial Oligarchs

Writing in the FT, Martin Woolf asks whether 'America is the new Russia'. The power of the financial sector to influence government and attract subsidies from the public purse is corrosive. Graphs of relative wages and financial sector profits show how much hold the financial sector had generated over the economy as regulation was reduced.

Will increased regulation, which everyone now expects, reverse this? The volume of noise generated by interested parties seeking to reduce the impact of regulation makes one wonder whether new regulation will be toothless.

Credit crunch humour

Here is a piece of internet humour about the credit crunch, I'd attribute it if I knew the author. For the moment credit it to 'anon'.



The Credit Crunch Explained

At last! An explanation I understand...

Heidi is the proprietor of a bar in Berlin. In order to increase sales, she
decides to allow her loyal customers, most of whom are unemployed
alcoholics, to drink now but pay later. She keeps track of the drinks
consumed on a ledger (thereby granting the customers loans).

Word gets around and as a result increasing numbers of unemployed alcoholics
flood into Heidi's bar.

Taking advantage of her customers' freedom from immediate payment
constraints, Heidi increases her prices for wine and beer, the most popular
drinks. Her sales volume increases massively.

A young and dynamic customer service consultant at the local bank recognizes
these customer debts as valuable future assets and increases Heidi's
borrowing limit. He sees no reason for undue concern since he has the debts
of the alcoholics as collateral.

At the bank's corporate headquarters, expert bankers transform these
customer assets into DRINKBONDS, ALKBONDS and PUKEBONDS. These securities
are then traded on markets worldwide. No one really understands what these
abbreviations mean and how the securities are guaranteed. Nevertheless, as
their prices continuously climb, the securities become top-selling items
because (insert here the name of your financial advisor) recommended them as
a good investment.

One day, although the prices are still climbing, a risk manager of the bank,
(subsequently of course fired due to his negativity), decides that the time
has come to demand payment of the debts incurred by the drinkers at Heidi's
bar. But of course they cannot pay back the debts.

Heidi cannot fulfill her loan obligations and claims bankruptcy.

DRINKBOND and ALKBOND drop in price by 95%. PUKEBOND performs better,
stabilizing in price after dropping by 80%.

The suppliers of Heidi's bar, having granted her generous payment-due dates,
and having invested in the securities, are faced with a new situation. Her
wine supplier claims bankruptcy, her beer supplier is taken over by a
competitor.

The bank is saved by the Government following dramatic round-the-clock
consultations by leaders from the governing political parties.

The funds required for this purpose are obtained by a tax levied on the
non-drinkers.