Phorgy Phynance

BNP Paribas and fair value accounting

with 9 comments

On Monday, I commented on an article from Wellington Financial on fair value accounting. This morning they’ve written another article related to BNP Paribas:

BNP Paribas plays the canary role

Fair value accounting might make sense in a time of high liquidity, but what do you do when liquidity dries up? I’m no expert, so the accounting provisions might be suitably flexible to accommodate liquidity events, but it seems like a pretty significant challenge to me. What is the fair value when there are no buyers?

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Written by Eric

August 9, 2007 at 9:23 am

9 Responses

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  1. Eric, for real, you’re on your own. You understand that that what BNP is going through has nothing to do with Fair Value in a GAAP sense? They are trying to mark their portfolio to market to get an NAV for the fund, to enable them to value fund shares in the event an investor wants to redeem.

    I’ve responded to your buddy that started this but honestly….doooooooo soooooooooommmmeeeeee moooooooootheeeeeerfuuuuuuuuckkkkiiinnnnnggggggggg reeeeeeeeeseeeeaaaaarrrrrrccccccccchhhhhhh seriously, before you link to bullshit. You tell me you’re thinking about all this stuff all the time and you are obsessed with it, but then you link to this crap.

    Also classifying what you’ve linked to as an article is overly generous. It’s a sound bite, wrapped in a lack of context frosted with a complete lack of understanding. Just pointing that out.

    RowdyRoddyPiper

    August 9, 2007 at 11:05 am

  2. Eric, for real, you’re on your own. You understand that that what BNP is going through has nothing to do with Fair Value in a GAAP sense? They are trying to mark their portfolio to market to get an NAV for the fund, to enable them to value fund shares in the event an investor wants to redeem.

    I’ve responded to your buddy that started this but honestly….doooooooo soooooooooommmmeeeeee moooooooootheeeeeerfuuuuuuuuckkkkiiinnnnnggggggggg reeeeeeeeeseeeeaaaaarrrrrrccccccccchhhhhhh seriously, before you link to bullshit. You claim you are no accountant, and that is fair, neither am I, but this is really just some crackpot banging away on the drum of doom again. I gave your friend a link to FAS 159 which is the Fair Value Option. I’m giving it to you as well.

    http://www.fasb.org/pdf/fas159.pdf

    Also classifying what you’ve linked to as an article is overly generous. It’s a sound bite, wrapped in a lack of context frosted with a complete void of understanding. Just pointing that out.

    Also I think this guy is trying to get his operation mistaken for Wellington Asset Management.

    RowdyRoddyPiper

    August 9, 2007 at 11:19 am

  3. Hi RRP dude,

    Yes, I understand that what BNP is going through is not immediately related to fair value accounting in the GAAP sense, but the point is that the same issues that make it difficult to value fund shares are the issues that will make fair value accounting a challenge for everyone holding complex securities. Particularly in times of significantly reduced liquidity.

    I like this:

    “doooooooo soooooooooommmmeeeeee moooooooootheeeeeerfuuuuuuuuckkkkiiinnnnnggggggggg reeeeeeeeeseeeeaaaaarrrrrrccccccccchhhhhhh”

    🙂

    Exactly how would you define “research”? Over the last several months, I’ve said a bunch of stuff, and you’ve called me out several times, which is great and very much appreciated, but in the end, a lot (not all of course) of what I’ve said would happen has actually transpired. HY spreads widened, CLO and LBO activity is near a standstill and private equity is precariously sitting on the edge of massive redemptions. I’m not saying this with euphoric glee as some would suggest, but just stating some facts.

    Research means different things to different people and I’ve been doing research (quite successfully I might add) for the past 10+ years among some of the best minds on the planet (not that I count myself in that category!). First in engineering and then in finance. When I link to something, there is usually SOME information content that can be gleaned from it, whether you buy the entire story or not. What can be gleaned from Wellington’s post on BNP is that troubles involved with determining fund share values will also mean trouble for fair value accounting. Nothing deeper than that. I think Wellington is right to point that out. Whether it is obvious and not worth stating is a different subject.

    phorgyphynance

    August 9, 2007 at 11:28 am

  4. Eric, not to put too fine a point on it, but the lack in liquidity is precisely because people think that HY spreads were going to widen. No one wants to buy at +200 and wake up with a +300 mark. People are in a holding pattern, nothing more nothing less. Making this call as it’s happening doesn’t impress me much. Not that you are seeking to impress me, but still. Maybe it’s because you’re not on a desk right now, but you just don’t realize how much this is already taken into account. If you think it’s a long term correction and we’ve shifted paradigms, fine, I can respect that as a view but it’s premature to say that’s come to pass. If you’re saying that theres limited liquidity and spreads have moved out…great, all I can say to that is, no shit.

    inre: Wellington, I agree research is different in different areas and to different people. Linking to some unverified source on a subject you don’t know much about and opining on it qualifies as research under no one’s definition that I know. I know nothing about your previous field (engineering) but just try and take an example where someone who doesn’t really grasp what you are doing fully links to some crackpot that really doesn’t know what he’s talking about and weighs in. Not sure it happens since phynance is a little more media friendly than missle control systems, but maybe get my drift.

    Also pointing out that a fund CAN’T GET A FUCKING BID on its assets to calculate NAV for redemptions and saying this might be a problem for them arriving at fair value for their financial statements really shows a lack of appreciation for the differences of what fair value is used for in each context. In NAV it’s used to price shares in the fund, money will be left on the table for this being off on either side. Conversely in GAAP context it’s used to move unrealized gains and losses to the income statement. The issue with fair value in that context would be having an inconsistent valuation method. Let’s suppose that since no one is bidding (and I mean no one dude) that your market value has to be 0 because there is no price. Let’s supposed the accountants adopt this, then aren’t we going to look dumb when next month’s coupon comes in?

    RowdyRoddyPiper

    August 9, 2007 at 12:25 pm

  5. Hi RRP,

    Just a quick comment (on my way out the door). You’ll have to just take my word for it I guess. I didn’t call HY widening on NP because I thought my employer wouldn’t appreciate it much and I only began freely speaking about it pubicly after I resigned on July 9. I was warning my shop (as I outlined) about widening at least a month before Bear Stearns’ HFs blew up. When BS’ HFs blew up, the widening subsequent was obvious, but not immediately priced in and I still think it has a long way to go.

    HY is still extremely overpriced in my opinion.

    Later!

    PS: You may not have seen it, but I gave somewhat of a brief timeline here:

    https://phorgyphynance.wordpress.com/2007/08/08/the-new-phone-books-here/#comment-60

    phorgyphynance

    August 9, 2007 at 12:53 pm

  6. Eric,

    honestly, I think the best thing to do right now for you and the rest involved is to take a few valium and sit back and stop watching the market. I heard the Weather Channel is also very entertaining those days.

    Seriously, what happend to BNP is currently happening to everyone holding ABS positions. Don’t think they are the only ones. What they did was just right and the only thing they COULD do. Imagine you hold a AAA tranche of Armageddon-proof ABS these days and ask BadBank for a mark:

    Phorgzilla: Hi, can you give me a quote for Armageddon-proof ABS AAAs ?
    BadBank:

    Similar if you call GoodBank:

    Phorgzilla: Hi, can you give me a quote for Armageddon-proof ABS AAAs ?
    GoodBank: What number you wanna hear, mofo ?
    Phorgzilla: Ahem…
    GoodBank:

    That’s the way it is when marktet is on fire but nothing new for the experienced players.

    Cheng

    August 9, 2007 at 11:35 pm

  7. Seems like some characters were not properly parsed. Imagine a “Click” in the empty lines.

    Cheng

    August 9, 2007 at 11:37 pm

  8. Cheng, this is me on Valium…in this market I’d be a fool to not sedate myself. 😉

    RowdyRoddyPiper

    August 10, 2007 at 6:15 am

  9. I wanna be sedated.

    phorgyphynance

    August 10, 2007 at 6:27 am


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