Looking back at it now, one question still glows in embers – who was responsible? As the worst recession in our lifetime is slowly turning into a memory, millions of people are still suffering in a recovering global economy. The haste of numerous banks in creating toxic securities was not just the result of the US Fed creating a speculative real estate bubble with low interest rates, but also a result of greed. Greed and recklessness.

As most of us are familiar with what happened after, mortgages that should have never been permitted were granted with little financial reason. “No down payments? No credit history? No loan documentation? No problem – we’ll get you a loan”. And the gluttony of the culprits lead to the use of these mortgages to create packaged, yet questionable, debt securities that infected the global financial system. A vaccine was not even available as few people knew the true nature of these “investment vehicles”, the few that unleashed them.

When the truth got out and it was clear that the dreamed-up value of these synthetic instruments was sure to crumble sooner or later, the hurricane began and it destroyed everything in its path. There goes Lehman and Bear Stearns. Complete and utter paralysis ensued – one that had an unfamiliar feel to Wall Street. Nobody knew what to do, so why would institutions make credit available? Credit paralysis lead to the bankruptcy of numerous debt-dependent businesses, showing how hopelessly reliant on debt the US economy is, and the recession stepped in full force. Almost all bank executives were booted, except at Goldman Sachs, the largest producer of toxic synthetic instruments.

Hey – now, it’s not all that bad. Our vehicle manufacturers are stabilizing as Toyota suffers, gold and oil are on the rise, S&P is back up at 10,500 (almost double from a year back), and the US economy grew 5.9% annualized in the 4^th quarter of 2009. Great stuff!

As I opened up my news feed this morning, I realized the crisis is just a memory. Bonuses are back up after the year-end earnings reports and investment bankers are once again trying to profit from other peoples’ money. It was nice to hear that the Goldman Sachs that we all know and love kindly helped Greece through complex derivatives. Were the real culprits of the crisis penalized? Did they learn their lesson from the events of just a year or two ago?

As I said, it’s not all that bad. What’s AIG’s $8.8 billion loss compared to last year’s $61.6 billion? Peanuts.

Image Credit: Ani Carrington under a Creative Commons License

Being an accountant by trade, I’ve had some thoughts about how the recent spotlight on ‘fair-value’ accounting has been affecting the markets. Essentially, fair-value is a set of accounting principles that reflect financial statement items at current market prices rather than historical cost prices. The entire world’s accounting standards are moving towards fair-value presentation. The basis for this is that it provides more current figures and gives investors more transparency into the health of the company, while original prices may be outdated and no longer relevant for users.

They are right, and absolutely wrong.

Although fair-value accounting should be implemented for increased reliability in financial statements, there should be a limit to the pressure fair-value puts on companies. The perfect example is American International Group Inc (AIG). This American giant was forced to write down $4.88 BILLION worth of assets to then-current trading prices to accord to fair-value accounting. Not only did this massive write-down send the stock to the bottom of the ocean, it also cried out for a more reasonable approach.

Personally, I do believe that fair-value accounting should be implemented. It’s much more adapted to today’s dynamic business environment than historical-based accounting. However, when the markets are frozen and illiquid, writing assets down to fire-sale prices is completely ridiculous. Just because the assets may be worth pennies on the market does not mean they do not provide value to the firm itself. Especially with the newly found volatility we have been experiencing lately, these could just as well go back up in value once the economy recovers. Unfortunately, write-ups are practically never made in accounting, so AIG is likely stuck with its completely destroyed balance sheet.

My take on it: auditors and accountants that sign off on public statements should be given protection against being sued if the company goes bankrupt. It is rarely their fault, but signing off on written-down statements like AIG’s and causing a company bankruptcy can easily lead to the auditors carelessly being sued.

More importantly, FASB, AcSB and other accounting bodies have been too rigid in their fair-value accounting requirements, and although the rules will lead to new international standards, they need to be worked on to be more flexible.

Image credit: Jan Bakker