Wednesday, 19 August 2009 01:00

These (reknown) academics are on to something.

From Blomberg: Scholes, Merton Says Banks Should Value Assets Better

Aug. 19 (Bloomberg) -- Myron Scholes and Robert Merton shared the 1997 Nobel price for economics, and they are now united in calling for banks to give more accurate valuations on their illiquid assets.

Financial institutions should use mark-to-market accounting or list the hard-to-value securities on public exchanges whenever possible, Scholes said in a Bloomberg Radio interview yesterday. Scholes, winner of the Nobel with Merton for helping invent a model for pricing options, said investors need better data on prices to accurately value the debt and equity securities of banks.

“I’d like to see us encourage many more securities held on the books of the banks be migrated to exchanges if possible,” he said. Doing so would “allow for market discovery and market pricing as much as possible,” Scholes added.

Banks that oppose new accounting standards on asset values want to conceal depressed prices, Merton wrote in the Financial Times yesterday. He composed the column with Robert Kaplan, a professor at the Harvard Business School along with Merton, and Scott Richard, a professor at the University of Pennsylvania’s Wharton School.

“This is not the way forward,” they wrote. “While regulators and legislators are keen to find simple solutions to complex problems, allowing financial institutions to ignore market transactions is a bad idea.” Amen, my brother from another mother!

Sealed‘Blow Up or Burn’

The Financial Accounting Standards Board said Aug. 13 that it will consider expanding fair-value rules to loans, a step that might accelerate banks’ recognition of losses and trigger lower earnings and book values. Accounting rules now let companies recognize most loan losses only when management judges them probable. Applying fair value to loans would require earlier recognition of losses.

Banks would benefit if some of their debt automatically converted to equity during a crisis, reducing the need to unload assets in frozen markets, Scholes said yesterday.

“That would mean the price to the banks and other financial institutions would increase accordingly, and the necessity of bailouts would be reduced and the necessity to sell assets at times of shock would also be reduced,” he said. “We have to think about market mechanisms that actually reduce the costs associated with adjusting capital structures.” Again, another valid point.

Frozen Markets

Regulators need to “blow up or burn” the private over- the-counter derivative markets to help solve the financial crisis, Scholes said on March 6. Because markets had frozen, investors weren’t getting timely prices to inform their decisions, he said then, speaking at New York University’s Stern School of Business. Preach on. I, of course, would prefer the "blos up" option Sealed...

Last modified on Wednesday, 19 August 2009 01:00

2 comments

  • Comment Link ken09 Thursday, 20 August 2009 23:42 posted by ken09

    Fitch downgrades Lloyds and RBS debt


    Now why doesn't this happen in the US?

    Lee Jones - 20-Aug-2009
    Fitch Ratings has downgraded the subordinated debts of Lloyds Banking Group and RBS after the EU Commission revealed that it could force banks to default on coupon payments.
    This week Northern Rock revealed it was to defer payments on its subordinated debts, a cost-saving decision available to UK nationalised banks through the Banking Act.
    But the EU Commission revealed last month that it could force state-aided banks to default on certain payments in favour of more senior debts.

    The EU Commission states that: “banks should not use state aid to remunerate equity and subordinated debt when those activities do not generate sufficient profits” which means that it: “may favourably regard the payment of coupons on newly issued hybrid capital instruments with greater seniority over existing subordinated debt”.

    As a result, Fitch Ratings has downgraded the ratings of hybrid securities at Lloyds Banking Group, RBS, ING Group, Dexia Group, ABN Amro, SNS Bank, Fortis Bank Nederland and BPCE.

    Moody's has also downgraded the debt of ING, thanks to its: "assumption of a high probability of coupon suspension on its securities as a result of the ongoing discussion between ING Groep and the European Commission."

    Fitch Financial Institutions managing director Gerry Rawcliffe says: "In Fitch's view, the capacity for the Commission to materially influence both the capital remuneration policy and the future shape of state-aided banks should not be under-estimated.”

    This comes as both RBS and Lloyds’ restructures are negotiated with the EU Commission. EU Competition Commissioner Nellie Kroes recently warned that the banks would have to be cut down. She said: “The need for competitive market structures is stronger than ever; the likelihood of significant divestments by RBS and Lloyds is strong.”

    http://www.moneymarketing.co.uk/cgi-bin/item.cgi?id=192074&d=340&h=341&f=342

    http://finance.yahoo.com/q/cq?d=v1&s=idg,abn-pe,inz,isf,isp,ind,isg,abn-pg,aed,aev,igk,aeh,rbs-pn,aef,rbs-pm,rbs-pq,rbs-pf,rbs-pl,rbs-ph,rbs-pr,rbs-pt,rbs-ps,nw-pc,rbs-pp,aeb,

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    ABN-PE 4:00pm ET 9.60 -3.43 -26.32% 584,465 Chart, Messages, more...
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    RBS-PH 4:00pm ET 11.92 -3.07 -20.48% 296,185 Chart, Messages, more...
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    AEB 4:00pm ET 12.12 -2.88 -19.20% 239,842 Chart, Messages, more...




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  • Comment Link NDbadger Wednesday, 19 August 2009 12:06 posted by NDbadger

    Don't hold your breath.

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