Deus Ex Macchiato

This blog has consistently emphasised (OK, consistently bored the pants off its readers by emphasising) the importance of valuation ranges for financial instruments. For many such things, the idea of a single correct fair value is a mirage. Instead, it is more helpful to think of a range of values which might be correct.

Steadily both accounting standards and regulation has been coming around to our way of thinking (something for which we certainly claim no credit). There is a particularly clear example in the latest FSA discussion paper:

In April 2008, the Bank of England’s Financial Stability Report analysed the range of values produced by six Large Complex Financial Institutions (LCFIs) at the end of 2007 for super-senior tranches of Collateralised Debt Obligations (CDOs).

These tranches were the most senior slice of CDO structures and would therefore be expected to have a AAA credit rating at inception. The chart below shows the maximum capital requirement for such a position relative to the valuation range. In all cases, the maximum capital requirement is smaller than the variation in valuations (highest valuation minus lowest valuation reported) of the tranches produced across the six firms.

Now, it is important to understand what is claimed here. These ranges are not for the same security. One cannot infer that Bank A had a partcular mezz supersenior at 90 and Bank B had the same tranche valued at 45. All that one can infer is that Bank A had one mezz supersenior security valued 55 points over Bank B’s value for an entirely different mezz supersenior tranche. Thus much of the range reflects differences in CDO composition. Quality matters in a crisis.

The capital requirement is also misleading in that if the piece is written down from par, that loss reduces capital, so the effective capital taken is the capital requirement plus the writedown. (There is amusingly pious language elsewhere from FSA about trying to ensure that capital requirements are never more than 100% of notional – something they have thus far failed to do in various places in the capital rules.)

FSA legerdemain (which for me weakens their argument considerably) aside, there is a real point here. There are some securities whose fair value cannot always be determined accurately. It is likely that different banks will have different valuations for securities like this. Moreover, in some extreme cases, the range of values can be a significant fraction of the effective capital requirement. That’s fine, but it needs to be understood by readers of financial statements.

Posted in: Fair Value by David /
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From Ben Bernanke’s speech, The Supervisory Capital Assessment Program–One Year Later:

Importantly, the concerns about banking institutions arose not only because market participants expected steep losses on banking assets, but also because the range of uncertainty surrounding estimated loss rates, and thus future earnings, was exceptionally wide. The stress assessment was designed both to ensure that banks would have enough capital in the face of potentially large losses and to reduce the uncertainty about potential losses and earnings prospects.

The premise here is I think entirely accurate: it was not just current losses that were spooking investors during the Crunch, it was uncertainty over how large future losses would turn out to be. I’m not sure the FED’s stress assessment did that much – the capital and liquidity injections were much more important – but still, the phrasing is interesting. (Remember that the stress tests were not that stressful.)

Later in the speech, Ben makes another interesting point:

Importantly, to conduct effective stress tests, banks need to have systems that can quickly and accurately assess their risks under alternative scenarios. During the SCAP, we found considerable differences last year across firms in their ability to do that. It is essential that every complex firm be able to evaluate its firmwide exposures in a timely way. One of the benefits of the stress testing methodology is that it provides a check on the quality of firms’ information systems.

As I discussed, one reason for the success of the stress tests was the public disclosure of the results. We are evaluating the lessons of the experience for our disclosure policies.

Clearly there is the potential for disclosures here to be really insightful for investors. We have seen how useless VAR disclosures were for predicting losses during the Crunch: perhaps stress tests results, especially if standardised across the industry and thus directly comparable, will be more useful. It certainly can’t hurt (well, it can’t hurt unless an actual loss appears in a situation which is close to one of the ones tested, and it is much bigger than that test would have indicated). Stress tests are here to say, and financial institutions will need to get used to them; to resource themselves so that they can run them easily; and to prepare for the consequences of disclosing the results of them.

Posted in: Accounting, Fair Value, Mother of all Bailouts by David /
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I like Steve Randy Waldman so I don’t want to cricitise him too much, but I think he makes an error in the following:

On September 10, 2008, Lehman reported 11% “tier one” capital and very conservative “net leverage“. On September 15, 2008, Lehman declared bankruptcy. Despite reported shareholder’s equity of $28.4B just prior to the bankruptcy, the net worth of the holding company in liquidation is estimated to be anywhere from negative $20B to $130B, implying a swing in value of between $50B and $160B. That is shocking. For an industrial firm, one expects liquidation value to be much less than “going concern” value, because fixed capital intended for a particular production process cannot easily be repurposed and has to be taken apart and sold for scrap. But the assets of a financial holding company are business units and financial positions, which can be sold if they are have value. Yes, liquidation hits intangible “franchise” value and reputation, but those assets are mostly excluded from bank balance sheets, and they are certainly excluded from “tier one” capital calculations. The orderly liquidation of a well-capitalized financial holding company ought to yield something close to tangible net worth, which for Lehman would have been about $24B.

What’s wrong? I suspect at least the following:

• First, the costs of bankruptcy are considerable. The Enron liquidation, for instance, involved fees of more than $600M, and Lehman is a lot more complicated than Enron. Therefore we can chalk up at least a couple of billion to bankruptcy costs, and probably more.
• In bankruptcy you are a known, forced seller (and terminator of derivatives contracts). The Lehman bankruptcy happened in a crisis – indeed in some ways it caused it. This meant that Lehman’s assets were liquidated under the worst possible conditions. The fact that they were sold for less than their holding value is unsurprising. A 20% discount to sell an illiquid asset in hurry would not be surprising – and Lehman had at least $300B of illiquid assets. So perhaps $60B here.
• More to the point, while Lehman sailed fairly close to the wind on its valuations, what it did not do – what few firms do – was be honest about the uncertainty in those valuations. If you read the detail of the valuation section of the Valukas report, you will find that a lot of the time, the correct value of assets is simply impossible to determine. What Lehman did was not perhaps conservative, but it was not illegally aggressive according to Valukas. Given Lehman’s assets, a 5% uncertainty in valuation is not surprising. That’s another $15B.

The real point is leverage. If you have (in round numbers) $30B of capital supporting $600B of assets, then $30B of uncertainty in valuation wipes you out. If you were half as leveraged, you could tolerate twice as much uncertainty. No financial will ever be liquidated for anything close to its accounting value, particularly in a crisis. But if firms are less leveraged, then they are more likely to have higher recoveries. Given Lehman’s leverage, going from a going concern value of +$30B to a bankruptcy value of -$50B is not at all surprising.

Posted in: Capital and Contingent Instruments, Fair Value, Mother of all Bailouts by David /
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Financial risk is the risk of loss. That implies that you know the current value of your portfolio. After all, saying that you might lose $10M from market moves is not that helpful if the portfolio is already worth $20M less than you think it is. Valuation, then, is absolutely fundamental to financial risk management. It is also very difficult to get right: checking the valuation of every instrument in even a moderate sized portfolio is difficult, especially if there are OTC derivatives or illiquid securities in it. So I suppose it is no real surprise that firms continue to the numbers wrong. But getting the process wrong – failing to a complete methodology for checking the valuation of the portfolio – that is fairly shocking.

It happens, though. From the Guardian:

The London branch of Toronto-Dominion Bank has been fined £7m by the Financial Services Authority for repeatedly breaching the rules governing the pricing of financial products…

The FSA found that the bank – one of the largest in Canada – had repeatedly failed to follow established procedures in ensuring that a proprietary trader’s books were independently verified, and did not have adequate controls in place that could have detected the pricing issues.

Posted in: Fair Value, Risk Management by David /
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Willem Buiter, reneging on his earlier negativity on the IASB, quotes from a statement made on April 2, 2009 by the Trustees of the International Accounting Standards Committee Foundation:

Sir David Tweedie, Chairman of the IASB, reported to the Trustees that at their joint meeting last week the IASB and FASB agreed to undertake an accelerated project to replace their existing financial instruments standards (IAS 39 Financial Instruments, in the case of the IASB) with a common standard that would address issues arising from the financial crisis in a comprehensive manner. Though the IASB is consulting on FASB amendments related to impairments and fair value measurement, the Trustees supported the IASB’s desire to prioritise the comprehensive project rather than making further piecemeal adjustments.

This is good. They are not being rushed into anything, and they are not following the FASB in giving in to the banks. However it does make it vital that the IASB gets sufficient informed comment on fair value during its consultative process. I would encourage anyone who cares about these issues to visit the IASB page here, download the consultative document, and comment on it.

Posted in: Accounting, Fair Value by David /
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The Geithner plan, understandably, has generated many column inches since it was unveiled on Monday. There is little consensus among the commentariat, but the markets have taken it well. What should we take from Timmy’s last (or at best next to last) stand?

First, it might actually work either by accident – because we are through the worst anyway and it doesn’t hurt – or by design. It is certainly positive in the short term for the shareholders of American banks. And it betokens a reluctance to nationalise which, while negative for the taxpayer, is the kind of thing markets like.

Second, it is clearly an ineffective use of money. The government is providing nearly all the cash. If the same amount had been spent on recapitalising the banks, then there would be more leverage and hence more assets controlled for a dollar saved. Taxpayers should be outraged by this.

Third, it indicates that Geithner believes that an interestingly modern form of systemic risk is important: the risk that quasi-forced sales by one institution causes losses at others via mark to market. This plan achieves a de facto recapitalisation (albeit wastefully) via the ability for all banks to mark their assets to the purchase price in the plan. This means of course that the plan managers will be strongly encouraged to pay more than the market price for the assets: something they can afford to do given the government subsidy built into the structure.

In summary, then, the plan is far from optimal, but it will probably help a bit. The concern is that it won’t be enough. If that happens, then Timmy will need a new job.

Update. Felix Salmon picks up an interesting quote from Sheila Bair. This makes it clear that the intent of the plan is to crush the non-default component of the credit spread:

They [the prices assets are bought into the plan] will still be, they will be market prices. We’re just trying to tease out the liquidity premium. What’s weighing on market prices right now is that people can’t get financing to buy assets, they can’t get financing to buy assets not many people want to buy, you don’t want to buy. And then you have to hold on to them forever because there’s nobody to sell them to. So, that’s — by providing that liquidity that’s lacking now, we’re hoping to get the prices up to what would really be a true market level.

They are doing this by removing all the risk – funding risk, liquidity risk, and credit spread volatility risk. It’s an awfully expensive way to recapitalise the banks.

Posted in: Fair Value, Mother of all Bailouts by David /
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No, not the closing down sale at one of Britain’s many bankrupt retailers, although it could be. Rather it is the fall in property prices from the peak in one of the exurbs of Fort Myers, Florida. The NYT story is here. But mull on that number for a second. 80%. Then consider putting -0.8 in the HPI vector, and think what that will do for the price of even prime RMBS.

Posted in: ABS, Fair Value, Mortgages by David /
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This week’s no shit Sherlock award goes to… Treasury Overpaid For TARP Investments. What is more interesting, though, is utterly spurious precision being treated as fact. Yes, I am sure Treasury overpaid, but saying things like Treasury paid $254 billion for assets worth approximately $176 billion implies that with a bit of due diligence, we could find the ‘right’ value. And we really can’t.

Posted in: Fair Value, Mother of all Bailouts by David /
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A great data point from S&P via the New York Times:

The wild variations on the value of many bad bank assets can be seen by looking at one mortgage-backed bond recently analyzed by a division of Standard & Poor’s, the credit rating agency.

The financial institution that owns the bond calculates the value at 97 cents on the dollar, or a mere 3 percent loss. But S.& P. estimates it is worth 87 cents, based on the current loan-default rate, and could be worth 53 cents under a bleaker situation that contemplates a doubling of defaults. But even that might be optimistic, because the bond traded recently for just 38 cents on the dollar, reflecting the even gloomier outlook of investors.

Or as a friend of mine put it, `if you wanna throw the dart at the board and give me an HPI vector, I can tell you what the bond is worth. But who the hell knows what’s the right HPI?’ Given that future house price inflation cannot be known today, he has a point.

Posted in: Fair Value, Mortgages by David /
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From the FED, Information on Principal Accounts of Maiden Lane LLC as at Wednesday, Oct 22, 2008

Net portfolio holdings of Maiden Lane LLC: $26,802M

Outstanding principal amount of loan extended by the Federal Reserve Bank of New York: $28,820M

So the FED is a couple of billion underwater. On October 16th, the assets were valued at $29,492M.

Posted in: Broker/dealers, Fair Value by David /
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Why, sometimes I’ve believed as many as six impossible things before breakfast said Alice. This quotation came to mind in the discussion of the 30y dollar swap spread in the FT recently:

“Negative swap spreads have been considered by many to be a mathematical impossibility, just like negative probabilities or negative interest rates,” said Fidelio Tata, head of interest rate derivatives strategy at RBS Greenwich Capital Markets.

Oh dear me. A mathematical impossibility is 2 and 2 adding to 5, or the sudden discovery of a third square root of 4. A physical impossibility is something that we think is impossible according to our current understanding of science: accelerating from rest to go faster than the speed of light, say.

Negative swap spreads are neither of those. They simply represent an arbitrage. An arbitrage is when you can make free money without taking risk. Ignoring for a moment the risk de nos jours – counterparty risk – swap spreads allow one to lock in a positive P/L if one can fund at Libor flat. Free lunches do not often exist in finance, but they do happen in particular when there are no arbitrageurs left standing. No arbitrage relies not on the theoretical possibility of a free lunch, but on enough people actually wanting to dine for nothing that prices move to stop the feast. At the moment there is such a shortage of risk capital that one can indeed find free food. So `impossible’ things are happening not just before breakfast but all through the day. Bon appetit.

Posted in: Fair Value, Financial Models by David /
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Long, long ago, when I was responsible for the valuation of a lot of financial instruments at an investment bank, I used to set a lot of store in valuation adjustments. The basic idea is that the precise fair value of many instruments is uncertain. You value them at your best guess, and you take a valuation adjustment to cover the potential uncertainty. They are a kind of accounting error bar, if you like.

There are two main reasons to do things this way rather than simply to mark conservatively. The first is that value affects risk: if you mark as accurately as possible, your risk measures are as accurate as possible. [This is particularly an issue for derivatives since d (delta) / d (vol) is non-zero: marking to a 'conservative' implied vol gives you the wrong deltas.] The second is that the size of the valuation adjustments are an important signal to management about the size of the valuation uncertainty in the book. That in turn gives important information on illiquidity, marketability etc.

Borio in a fascinating BIS paper The financial turmoil of 2007- argues that firms should disclose these uncertainties, and that this disclosure would be a useful disclosure to the users of financial statements. I agree completely. The only problem is that many people currently think that some firms would be insolvent based on plausible error bars. But they don’t know precisely who those firms are.

Posted in: Accounting, Fair Value by David /
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Yesterday, a most propitious day for stocks, the IASB chose to announce that they will permit a new wave of opacity to sweep over company accounts.

Notice that it is retrospective. This is a very negative development if we ever want to get out of this mess. The taxpayer deserves to at least know what we are bailing out and what condition the banks we now own are in.

Posted in: Accounting, Fair Value, Mother of all Bailouts by David /
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There is a lot of talk at the moment about fundamental value. This mostly focusses on how good it would be if the market prices of assets rose back towards ‘fundamental value’, and what the government could do to assist that process.

There’s only one problem. You can never know what the number is.

Consider a loan. Either it defaults, in which case you get some interest followed by recovery; or it doesn’t, in which case you get scheduled P&I. In both cases the fundamental value is the PV of the cashflows. But you don’t know whether it will default or not, so you can’t combine the fundamental value on default with that for no default to get a single number.

In credit risk modelling we solve this problem by positing a probability of default, and then deriving that PD from spreads. But that’s an argument that depends on the credit spread being fair compensation for default risk.

And of course ontologically it makes no sense to talk about a ‘probability’ of default. Either default happens or it doesn’t and we only get one chance at finding out. Given that we can’t take the same obligator, duplicate them a hundred times, and look at their performance on each occasion, we can never know that our ‘probability’ is correct. Thus there is literally no such thing as a ‘fundamental value’ in any scientific sense because we could never know whether we had such a thing.

Posted in: Accounting, Fair Value by David /
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I had a conversation about this last night and thought it was worth writing some of it down and extending it a little. So…

Let’s begin with the market. For our purposes there are some known current market variables which we assume are correct. This could be a stock price, interest rates, a dividend yield — and perhaps one or more implied volatilities.

Secondly we have a model. The model is often, but not always, standard, i.e. shared between most market participants. Let’s start with standard models. Here the model is first calibrated to the known market variables.

At this point we are ready to use the model. There is a safe form of use and a less safe one. In the safe one we use the model as an interpolator. For instance we know the coupons of the current 2, 3, 5, 7 and 10 year par swaps (plus the interest rate futures prices and deposits) and we want to find the fair value coupon for a 4.3 year swap. Or we know the prices of 1000, 1050 and 1100 strike index options and we want to price a 1040 strike OTC of the same maturity.

The less safe use is when we use the model as an extrapolator. We want a 12 year swap rate, for instance, or the price of a 1200 strike option. That’s not too bad provided we don’t go too far beyond the available market data, but it is definitely a leap.

(Both of these, by the way, count as FAS 157 level 2.)

Note that there are two ways that we realise P/L in derivatives. Either we trade them or we hedge them. If we are in the flow business then trading is important. We need to use the same model as everyone else simply because we are in the oranges business and we need to kInow what everyone else thinks an orange is worth. We take a spread just like traders of other assets, buying for a dollar and selling for a dollar ten, or whatever. The book might well be hedged while we are waiting to trade, but basically we are in the moving business. Swaps books, index options, short term single stock, FX, interest rate and commodity options, and much plain vanilla options trading falls into this camp.

In the hedging business in contrast we trade things that we do not expect to have flow in. Most exotic option businesses are an example here, as are many long dated OTC options. There is no active market here so instead we have to hedge the product to maturity. Thus here the model hedge ratios are just as important as the model prices. Valuation should reflect the P/L we can capture by hedging using the model greeks over the life of the trade. Thus standard models are more questionable in the hedging business than in the moving business since it is not just their prices — which are correct by construction — but also their greeks that matter.

Things start to get really hairy when we move away from standard models. Now we are almost certainly dealing with products where there is no active market (some kinds of FX exotics are a counterexample) and we do not even know that the model prices are correct. There is genuine disagreement across the market as to what some of these things are worth. Different models also produce radically different hedge ratios. How can we judge the correctness of such a model? The answer is evident from the previous paragraph: it is correct if the valuation predicted can genuinely be captured by hedging using the model hedge ratios. [Note that this does not necessarily give a unique 'correct' model.]

In summary then: for flow businesses we need interpolators between known prices and, to a lesser extent, extrapolators. For storage businesses we need models which produce good hedge ratios.

Posted in: Fair Value, Financial Models, Model risk by David /
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I have been meaning for a while to blog about a post on VOX about wine pricing. To paraphrase heavily, Parker determines the en primeur price, but the price at maturity depends on how good the wine really is. Given that Parker isn’t a really great judge of how a wine will mature, and weather charts are better than him, there is an arb. The most obvious example I remember is the 86s, which were clearly overpriced in their youth, and now have faded to over-oaked oblivion while the 85s are still going strong.

Posted in: Fair Value, Wine by David /
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In what is either a strong buy signal for the market or a strong sell signal on the stock, MBIA has announcing that it was not changing its projection of losses on its mortgage-related exposures. The FT story is here. Yes, they had some bizarre FAS 159 gains (CNN is here and my take on the rules is here): yes, they resumed a share buy-back programme. But ignoring all that, if their actuarial loss estimates for RMBS have not changed, either that is a very useful datapoint on where realised default losses actually will be, or their actuaries are fools and it is time to short the stock again. It will be interesting to see which.

Update. John Dizard has pointed out the possible value in the monolines as a vulture play on the eventual losses on RMBS. I can see the idea, but I’d like to know more about the implied residual value of the monolines given the current equity price. Are they really cheap yet?

Posted in: Fair Value, Insurance and Actuarial Practice, Monoline, Mortgages by David /
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Loath though I am to quote from a Murdoch publication – just look at the sad decline of the WSJ to see what being owned by him does to a paper – I do want to comment on something by Anatole Kaletsky yesterday. Fortunately it is an utterly wrong-headed piece which misunderstands fair value accounting. First the good bit:

the whole point of a bank is to exchange short-term, liquid, fixed-value liabilities for long-term, illiquid assets whose value is hard to gauge – this liquidity and maturity transformation is, in fact, the main social function that a banking system provides.

Agreed. But here’s the thing. Banks can only do that if people have the confidence to give them their money to lend to someone else. That depends, for the retail investor, on deposit insurance; and for the wholesale depositor, on credit quality. Both of those in turn rely on the bank being well capitalised: regulators demand it to reduce moral hazard, and market counterparties need it as part of their risk assessment.

Now how can we tell if a bank is well capitalised if it is allowed to pretend nothing is wrong until it actually suffers losses? That is what accrual is all about – the fiction that all is well while the ship steers at full speed towards the iceberg. At least fair value shows you what is ahead.

Posted in: Accounting, Fair Value by David /
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CFO.com has an excellent post on Fair Value accounting. One quote in particular amused me:

James Tisch, who was effectively the sole voice of dissent on the first panel, complained bitterly that fair value accounting required reams of nearly incomprehensible disclosure information and often forced his company to make poor economic choices.

Tisch … said that if insurance companies had to run mark-to-market accounting through their income statements, “[they] would essentially be out of business”

And that, as we have seen with the financial guarantee insurers, is clearly right. But perhaps if the insurers were forced to use fair value, they might deploy less leverage and pay a little more attention to what the market is telling them.

Posted in: Accounting, Fair Value, Insurance and Actuarial Practice by David /
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A couple of weeks ago I pointed out that while the US institutions have taken their write down medicine, raised new capital, and are busy getting on with trying to figure out what to do next, the Europeans have been much less assiduous in recognising their losses. Now Citigroup, via FT alphaville, comes up with a concrete example: Barclays. The corrected version of the Citi piece is said by the FT to include the following:

Barclays has reclassified some assets, most notably leveraged finance and CDOs, and accounts for them as if they were loans held to maturity. This means that these assets are not marked to market but impairment provisions are raised when the bank believes that there is a risk to the credit outlook. While this is an unusual treatment for leveraged finance, as the financing was originally intended to be sold down, the assets are at least primarily loans. The treatment is even more unusual for CDO exposures.

That four billion really does not look enough now, does it?

Update. It is not just CDOs. From the FT:

The debate has [also] focused on Barclays’ policy of accounting for leveraged loans by looking at the borrower’s financial performance rather than the price at which those loans are trading in the market.

This has puts it at odds with some US and European rivals, which value their leveraged loans on a mark-to-market basis. Most leveraged loans are trading at 80-90 per cent of their face value, with some changing hands for as little as 70 per cent.

Posted in: Accounting, Fair Value, Writedown by David /
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Tom Selling from The Accounting Onion was kind enough to point out his blog to me. Reading a post on FAS 157, it suddenly occurred to me that the implementation the audit firms have permitted of 157 on liabilities, based on the FASB staff position, isn’t consistent with the conceptual framework of 157.

The standard says:

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

Suppose I run David’s Broker/dealer, DBD. DBD bonds are liquid and so have an observable credit spread. If DBD credit spreads go out, DBD bond holders using fair value suffer losses which are reported in their P&L. But if DBD wants to buy back those bonds in an orderly transaction between market participants, DBD bond holders are very likely to force it to pay par plus accrued (at least if DBD is a going concern). Moreover it’s illegal for DBD to buy its own bonds back in the secondary market in most jurisdictions so the value of the liabilities for DBD is not symmetrical with the value to the holders: it cannot take advantage of its elevated credit spread even if it has the money to buy back the bonds. Hence the staff position doesn’t reflect economic reality, and what most people feel in their gut – that 157 gains on liabilities due to credit spread widening are bunk – really is true.

I’ll end with a quote from the amusingly petulant comment the Basel Committee issued on IAS 39:

it would be wholly unsatisfactory if an entity which was insolvent in the sense of its assets being worth less than the par value of its liabilities nonetheless appeared to be solvent because the fair value of its liabilities was recognised on its balance sheet, with the fair value below nominal value…we recommend that the exposure draft’s guidance on the fair value option be revised …[to] exclude the mark to market of own credit risk from the fair value option by limiting the mark solely to valuation changes due to general market movements

Posted in: Accounting, Fair Value by David /
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I have two conjectures for today. The first is that Ambrose Evans-Pritchard needs to drink better Rioja. He presents a bearish blog in the Telegraph, backed by a second class Reserva. I would suggest at least a 904 GR for such musings, and ideally the Murrieta.

Secondly and rather more importantly, it can be suggested that the loss trajectory for European banks will be rather different from their American cousins. Suppose we believe Evans-Pritchard’s loss figures: $123bn for Eurozone banks compared to $144bn for the US, and ignore for a moment the rather important distinction between bank and non-bank risk holders. (The US has far more of the latter.) My guess would be that most of the US risk is fair value accounted. So the Americans have taken or are in the process of taking their losses. Most of the European risk is probably accural, so losses will depend on the bank’s projected loan loss reserves rather than current fair value. At very least that will spread them out over many years – remember RMBS is often 30 year paper. Moreover if actual experienced defaults are better than the current fair values predict then the losses will be lower.

One could argue that this cancer will eat away at the European banking system for many years, long after the Americans have taken their medicine and moved on. Or one could argue that right now it allows European banks to keep lending and hence to both protect Europe’s economy from the worst of the losses and make themselves some money to pay for the losses. But certainly the bearish case for Europe is less convincing than that for the U.S.

Posted in: Accounting, Economic Theory, Fair Value, Markets, Wine by David /
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On Wednesday the Basel committee announced some changes to the Basel II framework. The press release is fairly short on detail, but it does give some insight into the forthcoming detailed proposals. Let’s take a look.

The Committee reiterates the importance of implementing the Basel II framework.

This is shorthand for ‘please Mr. Fed would you implement our Accord?’

…the Committee will revise the Framework to establish higher capital requirements for certain complex structured credit products, such as so called “resecuritisations” or CDOs of ABS.

Clearly CDO squared products and CDOs of tranched ABS have been a major issue so this is reasonable. But CDOs of pass throughs have much less model risk and behave in a much smoother fashion so I hope these will not be tarred with the same brush.

It will strengthen the capital treatment of liquidity facilities extended to off balance sheet vehicles such as ABCP conduits.

The issue here is implicit support: legally many of these lines were low risk, but reputational concerns forced banks to provide support where it was not contractually required. Rather than charging for liquidity, which will simply encourage the use of non-bank liquidity providers, the committee should cap the benefit available for securitisation.

The Committee will strengthen capital requirements in the trading book… The Committee … is extending the scope of its existing proposal guidelines for “incremental default risk” to include other potential event risks in the trading book … (planned 2010).

This is so frustrating. The capital requirements in the trading book are already high compared with the banking book, and the incremental default risk proposals are hardly a model of cogency or risk sensitivity. If the trading book charges are imprudent then the banking book ones are far too low. They should also be revising the correlations in the IRB formula and increasing the risk weights for risk below BBB- in the revised standardised approach. And surely they can get their act together a little faster than 2010?

The Committee will monitor Basel II minimum capital requirements … over the credit cycle… [and] will take appropriate measures to help ensure Basel II provides a sound capital framework

So no discussion of procyclicality and no acknowledgement of the need for anti-cyclical capital requirements especially for fair value assets. This is disappointing. Basel II seems to have become a self-sustaining industry where wholescale change is almost impossible. The extended timeframes and modest revisions are evidence that major regulatory change will need more impetus than just the biggest banking crisis in a generation.

In July the Committee will publish for consultation global sound practice standards for the management and supervision of liquidity risks.

What about capital for liqudity risk?

Weaknesses in … valuation practices for complex products have contributed to the build-up of concentrations in illiquid structured credit products and the undermining of confidence in the banking sector. The Committee is taking concrete action to promote stronger industry practices in this area.

What pray might those be? If it doesn’t trade, it isn’t Level 1. Stronger practices whatever they may be need to acknowledge that fair value is often an estimate and that uncertainty in valuation will always be with us. This is fundamentally an investor education problem: equity holders suffer the same realised earnings volatility whether the asset is fair value accounted or not; hiding that volatility via loan loss provisions in the banking book just turns the spotlight away, it does nothing about the real risk. Supervisors seem to be aware of the issues with structured credit in a fair value context but reluctant to acknowledge that these risks are still there in an accrual context, just concealed by the accounting.

Are these changes going to help? A little, although putting a charity slot in the wall of the BIS might be more effective: there is much more that needs to be done, and done quickly.

Posted in: Accounting, Basel, Fair Value, Liquidity and liquidity risk, Photography, Regulation by David /
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I’m away from my desk at the moment so posting volume is reduced, but I do want to draw attention to an excellent piece by David Roche in the FT. Firstly he points out the importance of non banks to the liquidity of the US financial system:

The Federal Reserve has belatedly recognised that investment banks, hedge funds and other non-deposit-taking financial institutions are as vital as banks to both the financial and “real” economies. The Fed is lending them massive amounts of capital through newly created facilities. It is right that central banks should be able to do so; NDFI’s create more “asset money” than banks but are much riskier institutions.

NDFIs, though, are not regulated as deposit takers, and in particular the broker/dealers benefit from SEC supervision. As David continues:

What is wrong is that the Fed is doing so without having oversight or supervision of the borrowers.

He then looks at both the size and the velocity of NDFI money:

Investment bank, hedge fund and broker balance sheets are about half the size of the commercial banks in the US and about one-quarter the size in Europe. Both assets and liabilities of NDFIs are dominated by repos, meaning that NDFIs lend and borrow based upon collateral of assets that are constantly marked to market. As asset prices fluctuate, leverage must constantly be adjusted.

This is related to the procyclicality of a leveraged fair value player as I discussed here. As David explains:

In a bear market, as asset prices fall, leverage is reduced. This causes lenders to ask for more collateral on existing loans and borrowers to sell assets so as to reduce the need for such loans and for additional collateral.

The opposite happens in a bull market when rising asset prices cause the balance sheets of NDFIs to expand. The liquidity this creates is used to invest in assets, boosting their prices and creating demand and collateral for more borrowing to make more investments.

So the balance sheets of NDFIs are highly geared to asset price cycles. They act in a pro-cyclical manner, reinforcing bull and bear market cycles and through them economic cycles. So the effect on “asset money” is greater than that of deleveraging by banks, which lend for a wider range of purposes than NDFIs.

Posted in: Broker/dealers, Fair Value, Regulation by David /
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The FT has a rather alarmist article about ABS valuation. Unsurprisingly to anyone who has been in the market, but a surprise apparently to a regulator was the fact that for some ABS

There was little confidence about how to value the holdings

The wrong conclusion is drawn from this

To an extent, the valuation problem for CDOs reflects the fact that the frenetic pace of innovation seen in the financial industry this decade has outpaced the development of its infrastructure. [...]

But unless circumstances arise that force a market trade, valuations often remain at the investment managers’ discretion. While managers say they strive to assign honest values, these are often difficult for an outside accountant to verify, since the techniques used are invariably highly complex.

The market infrastructure isn’t the problem and neither is the complexity of the techniques used. It is simple old fashioned invisibility of the model inputs. Let’s take a German middle market corporate with no issued bonds and privately held equity. What is the fair value spread for a loan? Well, there are things you can do based on discounted cashflows and models of corporate structure and so on, but they are approximate. If you came to try to sell that loan, you might get a different price from your model. It is the same with IPOs (which is why there is a pricing range which is often revised before the company comes to market).

There may well be problems with CDO models – the right choice of copula is unclear in some situations for instance. And market infrastructure is not perfect, particularly on the legal side. But fixing these issues won’t give a market price to something that does not trade. It might however help if commentators who are perfectly comfortable with utterly subjective loan loss provisions in the banking book accepted that when the same kind of assets are subject to fair value the determination of those fair values can be problematic. That doesn’t mean the assets are bad, just that market participants need to understand and manage valuation risk.

The place this really gets delicate is when actions depend on estimates of fair value, for instance in a SIV where the definition of solvency might depend on the ratio of the FV of assets to the notional of liabilities. Writing that kind of clause is asking for trouble if there is any doubt that the FV of the assets is easily determined.

Posted in: Accounting, Fair Value by David /
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Broadly I am a supporter of the use of carefully estimated fair values for financial instruments: I think that accrual accounting hides a lot of information that the users of financial statements deserve to know. However, there is one aspect of fair value that is troubling: how it combines with leverage to provide another incentive to procyclicality. To see this, suppose we start with a bank that is Basel 1 adequate, i.e. its leverage is less than 12.5:1 (remember 1/8% = 12.5).

This bank uses fair value for all of its assets, and the markets rise, so we find

Of the 100 of P/L 50 is dividended to shareholders and 50 is kept as retained earnings. Retained earnings are a component of capital so we have:

At this point management will be concerned that the ROE of the bank will suffer due to the falling leverage, so they acquire more assets to get the leverage back to 11:1, originating 450 of new assets.

Unfortunately now the market falls back and the 1650 of assets are now worth only 1600. This causes a loss of 50. Losses are a deduction from capital, so now we find

At this point the bank is capitally inadequate and either has to sell 350 of assets or raise 28 of new capital to get its leverage back under the regulatory maximum of 12.5:1. In other words, when times are good, the bank extends more credit, and when they are bad, it either has to raise new capital (and until it has recapitalised it cannot lend further) – or perhaps even worse, it may well sell assets into a falling market, exacerbating the decline.

One could argue this is not the fault of fair value, but rather of the leveraging up that took place during the rising market. However in order not to encourage this, shareholders need to understand that, unlike an accrual accounted bank, a fair value bank will have low leverage in a rising asset price environment and higher leverage in a falling one. I am not convinced that is well understood at the moment so the temptation to overleverage may well be there.

Posted in: Accounting, Fair Value by David /
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Naked Capitalism points out a scary new letter from the SEC to CEOs regarding valuations under FAS 157. The NY Times has a good summary: If Market Prices Are Too Low, Ignore Them. The offending part of the guidance is:

Fair value assumes the exchange of assets or liabilities in orderly transactions. Under SFAS 157, it is appropriate for you to consider actual market prices, or observable inputs, even when the market is less liquid than historical market volumes, unless those prices are the result of a forced liquidation or distress sale.

My contempt for this is boundless. The point about mark to market is that you estimate the price of a current transaction. If there are more buyers than sellers, then prices will be falling. Whether some of those sellers are forced is irrelevant. If you had to sell today, you would be joining them, so the price they are getting is the best pricing source for a current transaction. End of.

Posted in: Accounting, Fair Value by David /
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Even though this article appeared on the Sunday before a Bank Holiday Monday, I don’t really think it was deliberately buried. It is just that it might be troubling to some. From the FT:

The first public price estimates for specific structured credit securities to have emerged since the start of the credit crisis show that values have fallen sharply.

Some securities have lost almost a third of their value – even though many were considered to be so safe that they carried top-notch ratings from the credit ratings agencies.

Meanwhile, some subprime mortgage-linked securities issued by groups such as UBS have lost almost 95 per cent of their value.

The price estimates were made in a legal filing following a decision by JPMorgan Chase to ­publish detailed securities valuations in a Canadian court. The securities are linked to commercial loans and medium-grade mortgages.

The estimates are likely to be scrutinised by auditors and regulators since they come at a time when the issue of security pricing has become controversial.

Banks are under pressure from regulators to book losses they have incurred on such instruments. However, trading has virtually dried up in many corners of the credit markets, and it is hard to compare prices for these instruments between banks.

Many regulators and investors fear that banks are still varying in the degree to which they have booked losses on their credit instruments in recent months – not least because it is hard for auditors to compare internal estimates with external benchmarks.

The figures have emerged because the US bank is leading an effort to restructure a group of 20 Canadian structured investment vehicles that issued $32bn of asset-backed commercial paper.

JPMorgan and Ernst & Young lodged a report with an Ontario court gives estimates for the securities held by the Canadian SIVs based on implied values.

This is undoubtedly a data point but it is not definitive. Remember these are estimates, and liquidity has largely or completely disappeared in these instruments. It may be that the idea that the value of these instruments is impossible to determine precisely in the current market is lost on the court, but that particular fallacy should not trouble market participants.

Posted in: ABS, Fair Value, Markets by David /
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John Dizard continues the battering of mark to market in the FT:

Many now believe that like the fictional nuclear Doomsday machine, the unbending application of mark to market rules is not, in the end, a sane way to manage the world.

Here’s the problem: the mark-to-market rules assumed there would always be someone willing to buy or sell an asset at a price that bore some relation to the economic value it represented.

Well, no. Or at least, not really. The accounting principal after all is only known colloquially as ‘mark to market’. The formal name is ‘fair value’, and fair value can be applied to assets with no market, as in FAS 157’s level 3. Marking to a proxy has a long and honourable history which goes back much further than the current crisis. Anyone who has ever had a very large position or a highly structured position has probably marked to a proxy somehow or other (remember normal market size trades are a proxy for larger positions, and not necessarily a good one at that).

What would happen if we did not do that, that is if we went back to accrual? Then investors in banks would have no clue about the value of the assets on bank’s balance sheets, and they would instead have to trust to something even more subjective – loan loss provisions.

Now of course fair values can change without there being a material change in the likelihood of an asset failing to pay: changes in liquidity premiums, in the cost of financing the position, and in the volatility of the position can all do that. But those changes are important information for the users of financial statements.

Dizard continues:

Right now, though, the problem is that the capital bases of the major banks and dealers are being reduced by losses on the mark-to-market value of securities faster than they can raise new money. That means that because nobody wants to buy a lot of the structured credit products, credit made available by the entire system could contract. That would lead to more losses, and a further contraction of credit.

We call that a depression. Yes, eventually you get to a level of prices where transactions will “clear”, because some people will have enough gold or soyabeans or yuan to buy the distressed assets.

And we need to know where that level is. If we intervene before it is reached, there will be an enormous loss of confidence. Rather than being in the situation of knowing the worst is over, we will instead wonder whether it is, leading to, yes, further falls in asset prices.

A rather odd bit comes later:

Furthermore, as one board member of a very large dealer told me: “Aside from the shrinking capital (from mark to market losses), you are getting more and more assets being put in the illiquid “bucket” [by the accountants]. Those illiquid assets require a bigger capital charge, so you are getting a double whammy.”

What? What capital requirement, exactly, causes this double whammy? I’d love to know. It’s nothing in Basel 2, that is for sure, but the SEC website isn’t that easy to search. The closest I can find is:

The requirements of paragraph (a)(7), as revised, are intended to help ensure that a broker-dealer maintains prudent amounts of liquid assets against various risks that it assumes and that it maintain a robust internal risk management system.

But I can’t track down the full text of the illusive 15c3(1)(a)(7) or any of its relatives.

Dizard gets very interesting next:

Also, it has been suggested by some dealers, whose capital bases are getting too stretched to adequately maintain market liquidity, that they be given access to the Federal Reserve’s discount window and the generous Term Auction Facility. That would provide enough extra liquidity to keep more securities from being dumped into the capital-eating illiquid valuation “buckets”. This idea is likely to be taken seriously by the authorities.

Yep. The banks have become addicted pretty quickly to the crack cocaine of the TAF, aka ‘post what you like and we will give you money’. The broker/dealers want some of that happy powder. Ignoring for a second the question of why being able to repo something with the FED makes it liquid, this might even be the right short term policy response. Keep fair values for the assets, but provide funding for them. The difficulty will be weaning the banks and the dealers off this cheap liquidity.

Posted in: Accounting, Fair Value, Liquidity and liquidity risk, Regulation by David /
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With the markets in structured finance plummeting, there is clearly an incentive to polish up valuations for inventory positions. It appears as if some traders have given in to temptation at Credit Suisse. A press release today reveals an overestimate of inventory value amounting to $2.85B and the BBC reports that structured credit traders in London have been suspended.

What is interesting about this is how completely predictable it is. With the current market illiquidity, it is very difficult to price some structured credit products. At best you are marking many of them as a spread to some proxy such as the ABX or TABX. Clearly for CS to be confident that the positions are mismarked, they can’t be just in the margin of error: they must be well outside it. Which given the size of the margin at the moment, means that it might well have been fairly egregious…

Update. The WSJ’s take on the difficulty of marking to market in the current conditions is here.

Posted in: Fair Value, Writedown by David /
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Naked Capitalism makes two interesting points about Citi:

• Reading the Wall Street Journal we find:
  

  Citigroup’s subprime exposure — and source of its problems — are two big buckets that together total $55 billion, the bank said. The first bucket totals $11.7 billion, including securities tied to subprime loans that were being held, or warehoused, until they could be added to debt pools for investors. The second, totaling $43 billion, covers so-called super-senior securities.

  This position is larger than Merrill’s and so we can expect further very chunky write-downs from C at some point.

• Moreover unlike mother M., Citi does not appear to have done much to reduce its position. Why might that be? One possibility is that if Citi had sold, they would have had a mark, and that mark in turn would have had to have been used for the same assets in their conduits. Those conduits would then have missed the OC tests, forcing Citi into the unpalatable decision between providing them with implicit support or suffering the reputational damage of not doing so. If this really is the case, Citi is going to have its work cut out staying afloat as these securities decline further in value.

It is worth thinking about what would have happened before securitisation. Had Citi had the same assets then, they would all have been on balance sheet in the banking book, and hence not marked at all. They would have had considerable discretion about the size and timing of loan loss provisions, and the only write-downs would have been from actual experienced losses. In short we would not have had any real idea of how bad the problem was. I rather prefer it this way round.

Posted in: Fair Value, SIVs and Conduits by David /
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John Snow – Hank Paulson’s predecessor as Treasury secretary – isn’t that keen on the MLEC either. According to Reuters:

We’ve got all this paper out in the system, and my inclination is to say, let’s accelerate the price discovery process on this paper [...]

We know that when you prop things up artificially — Japan — we know when you prop things up artificially — the (savings and loans) in the United States — you get bigger adverse consequences

He has a good point. Warren Buffett is not keen either:

I think there should be a requirement that before the securities are put into the new super-SIV, 10 per cent of the holdings should be sold into the market to people who are not associated [with the subprime problem]

Certainly the history of intervention to prop up prices in the markets is not encouraging, and suspicions remain that the MLEC will not use the right mark. Perhaps it falls foul of the Market Abuse Directive? Oh, and the ABX is on the way down again. Here are the 07-02 BBBs:

Posted in: ABS, Fair Value, SIVs and Conduits by David /
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Strangely enough, some bankers are not happy with the idea of Citi et al. manipulating the ABS market by waving assets into the MLEC at the wrong mark. From the FT:

A committee of top international bankers on Sunday warned that the proposed $75bn mortgage securities superfund must be transparent in its pricing of assets if it is to help restore market confidence.

The statement by the Institute of International Finance reflected concern that the superfund, which is backed by Citigroup, JPMorgan Chase and Bank of America, is proposing to buy assets from troubled investment vehicles at higher than true market prices. Josef Ackermann, chief executive of Deutsche Bank and chairman of the IIF, stressed the importance of “proper valuations” and the need for financial institutions to “take the hits”.

One does wonder if the ‘one conduit to rule them all’ plan is going anywhere…

Posted in: Fair Value, SIVs and Conduits by David /
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Rich Bookstaber has a proposal:

[...] what if the government maintained a pool of capital on the ready to buy up assets of firms that are failing, much as Citadel did for Amaranth and Sowood? Of course, if a private entity is willing to step up to the plate, all the better. But as a last resort, what if the government took on the role that Citadel did in these instances. There would be no moral hazard problems, since the firm still fails. But the collateral damage would be contained; the market would be kept from going into crisis, the dominos would be kept from falling. And the taxpayer would have good odds of pocketing some profits.

That is all very well if the failing firm’s assets were really purchased at a market clearing level. But determining that level is very difficult, and the value of a portfolio in a distressed firm (as doubtless Citadel knew) is rather lower than in a going concern. There would be enormous pressure on such a government fund to overbid giving a better outcome for the firm’s shareholders but a worse one for the taxpayer. Also where is the government going to find the right kind of people to run its vulture fund? Great hedge fund traders tend not to be the type who want to be government employees. It’s a superficially attractive idea but I suspect it isn’t very practical. Mind you, the current asset dry dock MLEC doesn’t look that practical either…

Posted in: Fair Value by David /
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The importance of my earlier question about how the MLEC will price the assets it is going to purchase is highlighted by an article in the FT today:

[It has emerged that] Axon Financial, a SIV linked with the US hedge fund TPG-Axon, had taken losses of $110m on sales of $3bn of its investments.

Very crudely scaling from $110m on $3b to Citi’s $100b in conduit assets gives us a loss of $3b. So we know a real mark to liquidation would really really hurt. The market is so illiquid at the moment that it’s hard to be sure until you try to sell of course. So it should be no surprise to learn that many banks have not yet marked their conduit assets down:

One banker said last week: “The banks have varied enormously in terms of how much they have marked down their books – of course there are some that want to avoid the big write-downs.”

The MLEC then looks like an attempt at creating a new vehicle the banks can claim is arms length and which they can use to justify valuations which might not really be liquidation levels. That helps in turn helps the banks other conduits and the value of their on-balance sheet ABS. If you tell people it’s worth par often enough, loudly enough, maybe it will be…

Posted in: ABS, Commercial Paper, Fair Value, SIVs and Conduits, Writedown by David /
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Surely banks’ robust mark verification processes and extensive financial controls would not let this happen would they?

“If you’re a smart CEO, you’re going to write off everything and then some, maybe even to below-market prices, because you’re going to be hidden in the woodshed with everybody else,” says Daniel Genter, chief executive and chief investment officer of RNC Genter Capital Management [...]

“They’ll make it look a lot worse than it is, but that’s the smart move, because you’ve got little to lose and you might get some of it back in a quarter or two.”

Of course they wouldn’t do that. You just stand there and tell the tide not to come in.

Posted in: Fair Value, Writedown by David /
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Be careful what you embrace, particularly in the area of valuation policy. According to Bloomberg:

Absolute Capital Management Holdings Ltd. will stop clients from pulling money from eight hedge funds with $2.1 billion of assets after co-founder Florian Homm quit.

Investors will be asked not to remove cash for a year as the firm restructures the funds, Absolute Capital said in a statement today. Seven of the pools invested in over-the-counter U.S. stocks that can’t be sold at the prices at which the firm had valued them, affecting as much as $530 million of assets.

If an asset is marked at price different from where you can sell it, how exactly is that mark to market?

Update. I like this fragment from the Independent so much I want to quote it.

Sandy Chen of Panmure Gordon [Absolute Capital's Broker] said the apparent valuation shortfall “could prove fatal for the equity funds” and highlighted “the risk of investor lawsuits as an unquantifiable threat to earnings”. He slashed his price target from 750p to 150p…

Is that target change great? I just wish more analysts were willing to move their forecasts with such speed and robustness.

Posted in: Accounting, Fair Value by David /
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Or perhaps it is. I’ve just got around to looking at FASB Statement 157 on Fair Value from the tail end of last year. It is remarkably sensible. The definition of fair value is more or less the same as before

The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

Note though that the definition is based on an exit price (for an asset, the price at which it would be sold) so the intention is clearly to mark at bid/offer rather than mid or acquisition price. This presumably means everyone will show a loss when the buy assets (since they will buy at the offer, mark at the bid), although there is some mealy mouthed language that the standard “does not preclude” the use of mid-market prices or other “conventions as a practical expedient”.

The innovative part of 157 is the hierarchy of valuation principles:

Level 1. Valuation using quoted market prices for identical assets or liabilities in active markets.

This is the traditional idea of fair value: I have 2000 shares of IBM, and I mark them at the market price.

Level 2 — Valuation using observable market-based inputs, other than Level 1 quoted prices (or unobservable inputs that are corroborated by market data)

This is what firms mostly do in OTC derivatives: we see traded implied vols for some plain vanilla options (or perhaps simpler exotics in some markets) and we use those implieds (together with rates, dividend rate estimates, underlying prices and so on) as inputs to a valuation model to mark the entire book. Here we are saying ‘this 1478 strike 70 week OTC call on the SPX I own is worth $50,000 because brokers are quoting a 1450 strike 78 week call at $57,400 and Black Scholes calibrated to that known price give me $50K for my asset’.

Level 3 — Unobservable inputs (that are not corroborated by observable market data)

This is where we mark a mountain range option to (spread to) a historical correlation, for instance, or a private equity position based on projected cash cashflows.

Firms are required to use the lowest level possible, so the most market based marking must be used. Best of all, firms are required to disclose the split between the levels, and to discuss the basis of unrealised level 3 gains and losses. This should be a really useful disclosure for the readers of the financial statements issued by large financial institutions.

Now, consider Jos Ackermann’s recent call for banks to reveal their losses in the current subprime/ credit crisis. He’s right of course: banks should have an idea of what their exposure is, and they have a duty to reveal that to their investors. But at the moment a lot of securities and derivatives that would have been valued at level 1 last year would currently have to be valued at level 3 – there isn’t a market for many credit products right now. This shows the importance of FASB’s hierarchy: knowing that a bank has definitely lost $1B is very different from knowing that on the basis of non-market based estimates a bank thinks it might have lost $1B.

Update. Bloomberg backs me up here:

Dealers stopped providing prices on subprime bonds when trading dried up during July and August [...] the firms are reluctant to give low quotes that suggest clients have lost money and are even more hesitant to give high estimates that they would then have to honor as market-makers by purchasing the securities.

“The dealers are finding themselves away from their desks a whole lot more, [...] No one is willing to put out a quote.”

It was liquid, now it’s not, and you should be disclosing that fact.

Posted in: Accounting, Fair Value by David /
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