3/13/2008: An unforgiving eye: Bankers cry foul over fair value accounting rules

Excerpt from An unforgiving eye: Bankers cry foul over fair value accounting rules
By Jennifer Hughes and Gillian Tett

Accounting rules rarely top senior executives' agendas. But when Axa, the mighty French insurance firm, recently unveiled its results, its bosses were unusually outspoken in voicing their criticism of bean-counters.

"If you are in the medical business, you want to be sure that the thermometer is the right one for benchmarking things properly," said Henri de Castries, chief executive of Axa (pictured below). "The accounting systems in the economy are the thermometer, and I'm not sure their measurement scale is the right one."

It is a sentiment now being echoed with increasing vigour by financiers, particularly given the impending round of results from Wall Street brokers. As the credit turbulence has spread this winter, financial companies have unveiled a staggering swath of losses on instruments such as mortgage bonds. Axa itself, for example, recently revealed some €600m (£460m, $940m) of writedowns; meanwhile, western investment banks have reported hits of more than $181bn (£89bn, €116bn).

Many observers expect this tide of red ink to swell further in the next two weeks, when US brokers such as Bear Stearns (NYSE:BSC) announce results for the December to February period. The price of mortgage securities, as measured by indices such as the ABX, is continuing to fall, and there is pressure on banks to make large writedowns for corporate leveraged loans as well ... .

As the losses rise, anxiety is growing over the way these hits are being measured. At present, accounting is dominated by a concept of "fair value": companies are expected to report the value of their holdings in as "current" a manner as possible, which in practice means marking to market prices.

However, there is mounting concern that this approach creates distortions when markets are as dysfunctional as they are now. Indeed, some bankers fear that the system is actually making the crisis worse. Far from offering a reassuring yardstick, it is forcing banks and hedge funds to sell assets in a manner that is stoking investor panic - or so the criticism of men such as Mr de Castries goes.

More coverage of mark-to-market/fair-value accounting from the Financial Times.