Saturday, April 12, 2008

4/08/2008: Paul Volcker on fair value and mark-to-market accounting

Excerpt from address before The Economic Club of New York, April 8, 2008
By Paul Volcker

The combination of herd behavior, opaque loan characteristics, and breakdowns of market function at times of crisis has also raised important questions about the characteristics and usefulness of "mark-to-market" accounting, particularly its extension in uncertain and illiquid markets to what is euphemistically known as "fair value" accounting. That is too complicated a subject for me to linger on today. Suffice it to say there cannot be much doubt that "mark-to-market" is an essential discipline for trading operations, hedge funds and other thinly capitalized financial firms. What is at issue is the extent to which it is suitable for regulated, more highly capitalized intermediaries, including commercial banks. Their ongoing customer relationships, the value of which is not automatically correlated with reversible swings in market interest rates, cannot be easily reduced to a market price or a mathematical model.

I know very well that the seemingly simple approach of "fair value" accounting is a highly complex matter extending beyond financial markets. As it should be, resolution of these questions is in the hands of independent standard setters. I am encouraged that the issues are under review, and I trust minds are not closed as to the appropriateness of "mark-to-market" under particular circumstances.

Other comments by Paul Volcker on fair value and mark-to-market accounting.

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