This post is provided by our first “guest blogger” Sebastian Botzem. He is research fellow at the department „Internationalization and Organization” at the Social Science Research Center (WZB) in Berlin.
Fair value accounting has been identified as one of the causes of the current global financial crisis (see, for example, on this blog “Fair Value Accounting in Retreat?“). While it would be unfair to bookkeepers, accountants, auditors and academics to make them solely responsible for the loss of wealth and jobs, the present twists and quirks with regard to accounting policy are remarkable and merit closer attention.
A good example to show that the logic of accounting is questioned is Germany’s “bad bank” solution: In principle there seems to be agreement to clear balance sheets from heavily impaired assets in order to free up capital and cut the risk of further writedowns. How that should be done, however, remains a big question. One of the great unknowns is of course how to determine the price for the assets to be transferred. Also, it needs to be determined how and to which degree the German taxpayers are eventually being burdened with liabilities not just for years, but for decades. The legal construction is also interesting: Germany’s “bad banks” are supposed to be set up as Special Purpose Entities (SPE). Günther Merl, former speaker of Germany’s public banking rescue fund Soffin (Sonderfonds Finanzmarktstabilisierung, in English: Financial Market Stabilization Fund), has just argued in the German quality daily Süddeutsche Zeitung that the government should exempt the proposed “bad banks” from the usual regulation that applies to financial institutions. The intention of such a move is to allow for accounting provisions that treat “bad banks” not as banks. The creation of Special Purpose Entities – one cause of much of the turmoil at financial markets – to rescue financial institutions indicates the dire straits market advocates are in. Read the rest of this entry »
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