Wachovia deal says “fair value” is higher when the government stays away

Great news just in from Wachovia: It’s “fair value” rose by an astonishing 750 percent overnight, to $15.1 billion from $2.16 billion. That’s right. Yesterday at this time, Wachovia was supposedly worth only $2.16 billion — in the eyes of government regulators who were trying to force it into an arranged marriage with Citigroup. Turns out that the regulators were wrong. The market had other ideas.

Congress take note: regulators can get it wrong on both ends — high and low. Lucky for Wachovia’s shareholders — and the financial markets — Wachovia’s board didn’t listen. Best to let the market do its work and get out of the way.

Speaking of which, what about U.S. GAAP’s “fair value” accounting regime? How much was Wachovia really worth 24 hours ago? Either U.S. GAAP was lying then or it’s lying now. What’s the point of having companies report assets at “fair value” when fair value is so context-dependent and fluctuates by 750% in a matter of hours? Fair value makes sense in some contexts, particularly in highly liquid markets. In others, it is likely to be materially misleading.

IFRS vs. U.S. GAAP: Porsche controls Volkswagen

Since the SEC’s announcement of a proposed timetable for implementing IFRS in the United States, a variety of commentators have come forward asserting that IFRS would be “bad” for the United States because, among other things, U.S. GAAP supposedly offers “higher quality” financial accounting standards than IFRS and a smoother, more transparent standards-setting process than the IASB. In fact, the opposite is arguably true. Today’s news that Porsche has upped its stake in Volkswagen to 35.14% offers an illustration. Continue reading

FASB: SocGen’s Kerviel accounting was right?

Société Générale has been treated to all kinds of abuse for recognizing in 2007 Jerome-Kerviel losses “incurred” in 2008 just after the 2007 year-end cutoff. Floyd Norris has been especially critical of the French bank’s use of the “true and fair view” exception which he calls an IFRS “loophole.”

Well, as they say, what goes around comes around. In the Alice-in-Wonderland world of financial reporting standards setting the current U.S. financial accounting standards-setter (the FASB) is on the verge of effectively ratifying SocGen’s 2007 treatment of those Kerviel losses. This ratification comes in the form of an Exposure Draft — for lay readers, an “ED” is a draft of a new accounting standard — on the Disclosure of Certain Losses and Contingencies. More on that below. Continue reading