顾秀林译
Willem Buiter
Accounting according to Barclays:
declining creditworthiness as a source of profits
诚信和声望-消失了的利润源泉 金融时报2月9日
英国的会计准则何在？巴克莱PLC的会计规则何在？
作者：Willem Buiter
金融时报对巴克莱公司２００８年业绩的报告中说，“银行已确认该公司因复杂债务工具导致的减计损失达８０亿英镑，不过由于它的自身债务减计（１６．６亿英镑），该公司的总损失相应减少。”
我看过以后的第一个想法就是：这个报告肯定是不对的。如果你的上市交易的债务价值下降，那肯定是因为市场认为你的声望较之先前下降了；市场对你的债务的定价，所反映的是预计中的违约风险上升，这不会增加你的利润，只会更加提高你的信用风险。
这个“标价－出售”的市场在发疯。它无视这个事实：如果真的从债务价值贬损中会发生当前或未来利润的增加，而其原因却是支付了更高的违约风险金，那么这种利润首先是要用来清偿债务的。手握巴克莱公司债务的债权人比收取利润的人有更加优先的权力要求偿付（可参见本栏上期评论）。
根据我个人的理解，一个负债人以折扣价回购自己的债务，应该被视为违约行为。我在新兴市场和发展中国家工作时，总是在面对这种问题。不负责任的统治者会自己发行债务或者去向银行借钱。如果这个统治者失信，负了债的政府通常会躲在ＩＭＦ以及别的多国机构背后，把自己的债务（或者届时已经证券化了的债务）买回来，价格已经打过折扣。在一个君主举债的游戏规则中这样做是不允许的，但是却发生过。对于举债的一方来说，这不过是一种雕虫小技。你先去借钱花钱，然后让世界相信（特别是你的债权人）你有极大的风险。你的债权人急于离场，同意把债务折扣以后再出售给你。无需任何正式的违约破产程序。
当然，按照借贷合同规定，偿付一部分或者全部债务，减少债务的面值、实值或者合同规定的价值，肯定会降低负债水平。而且，不论是英国的会计准则还是巴克莱公司，都不会愚蠢到规定了资本损益条款之后，又把损失计算成利润，或者把利润记为损失吧？
正是由于这个道理，我去仔细读了巴克莱公司２００８年的报告和数字。我看到，财经时报没有说错：巴克莱真的把朽木雕成了玉器，它真是把市场对于它的声望的不利评价改写成了获利的助推力。请看：
“税前集团赢利60.77亿英镑，比2007年下降14％。利润包括：来自自有资本的收益24.06亿英镑，其中含来自雷曼兄弟的北美业务22.62亿英镑；到期付清的人寿保险账户赢利3.26亿英镑；来自信用卡ＩＰＯ和出售万事达信用卡股份赢利2.91亿英镑；信贷市场总损失80.53亿英镑；来自自身信贷的收益16.63亿英镑。”
我心中回响着的一个声音 “他们不会那么蠢”，推动我更深地进入该报告的深处。但是真的就是这么愚蠢，在它的年度报告第7页上写着，“巴克莱资产在２００８年的非常挑战性的市场上遭受损失，收益比２００７年下降18.88亿（27％），源于信贷市场的资产损失总额达62.9亿英镑，但部分被巴克莱资产公司发行的拓宽信贷领域的票据抵消达16.63亿英镑，此外还有相关收入及对冲减损达14.33亿英镑。”（底划线由作者所加）
我们看到，巴克莱公司２００８年的收益中，有16.6亿英镑的利润，是违反了经济学、金融学、商学和普通人常识的。
还有什么弄错了？
如果巴克莱公司真的可以把丢失信誉导致的市值下降计为利润，那么你会更想知道在这份会计报告中是否还有什么不合常理的东西。从2007年12月31日以来的一年中，该公司的平衡表上的资产规模从1.277万亿英镑增长到2.053万亿英镑，资产和负债两方都增加了差不多相等的7000亿英镑之巨，全都是来自金融衍生手段。在资产一方，有将近450亿英镑的金融衍生资产的估值是基于不可见的投入品（内部模型等），在债务一方，则有140多亿英镑的衍生金融的估价是基于不可见的投入。
在这次危机中，我信奉的是这样一条规则：如果是不可见的就一定是不可信的。
资产平衡表上的总价值巨增之时，最透明的资产价值项目却是缩减的：交易组合资产缩减80亿英镑，以平准价格持有的金融资产缩减350亿英镑。更多的资产记在“待出售金融投资项目”之下。而且平衡表上这些以平准价值持有的资产，其平准价值的变化却没有在损益表上注出。
除了极少数例外，现在所有的银行都在尽力长久地隐藏财务上的困境。在财务的管理上，确定待出售的财产如何改变估价，是一个部分解决问题的方法。不幸，领航者首先失了方寸，面对隐藏有毒资产和带有欺诈成分的资产的压力，难以拿出方略。
银行现在（其实）可以套上一匹马拉的车向前好好走，遵循平准定价的原则，并适时发布应当发布的信息。
把信誉评价损失再当一次利润来源
假定：我负有现值为1000英镑的１０年期债务。我没有遵循通常的法律（以财产抵押），而是把这笔债务抵押在我的未来劳动收入上。我没有金融资产，也不会在未来的有生之年得到金融资产。无风险的利率为零。我的债权人对于我按时偿债的能力具有完全的信心（直到他们发现我没有能力之前）。我的债务合同规定每年年末偿付100英镑；我的工资收入为每年150英镑，生存水平的年消费额为50英镑。首先假定此债为银行贷款，不能交易也没有价格。
刚刚签订了借贷协议，得到了并且花出了借来的钱（第一年之初），无法预料的消息告诉我只能再活５年了（到第５年末）。我还过五次（分期付款）钱之后，就回到了祖先那里。这笔借款发生了违约。以现价（折扣－利率为零没有折扣）计算银行损失500英镑。根据巴克莱的会计标准，我在预知死亡的时候获得了500英镑利润。但是感觉上并非如此。后来的收入、资源的流动、后来的消费都在哪里呢？本来依据折扣过的贷款现值，这些都是应该会实现的啊。
现在再假定，出借的银行不想等待贷款最终到期，我的债务变成可以交易的（一张票据），对现金流的规定不变。这张票据最初在没有关于我的健康信息时可以卖1000英镑。当消息披露时这张票据的价值降至500英镑。由于合同规定的借贷收益拥有的优先权超过我的获利权，于是实际债务的资本化了的价值减损，就不能成为我的利润或者收入。如果在我存活的５年中每年150英镑的收入在偿债和消费之后还有剩余，剩余就应该用来偿付债务中不能最终归还的部分，直到还清。
然而在巴克莱的会计天地里，一个银行可以从这种债务交易的麻烦中抽身走开，还可以把债务的缩减称为利润。这是荒谬的。这样的“利润”根本就不存在。最后，唯一还值得提出的问题是：这是否仅仅是巴克莱的会计准则，或者是英国的会计常规？还是大家都在这么干？
Willem Buiter
Professor of European Political Economy, London School of Economics and Political Science; former chief economist of the EBRD, former external member of the MPC; adviser to international organisations, governments, central banks and private financial institutions.
Accounting according to Barclays: declining creditworthiness as a source of profits
February 9, 2009 Financial Times
Either accountancy rules in the UK are generically nuts, or Barclays PLC’s accounting conventions are idiosyncratically nuts, or both are (nuts, that is).
In its report today on Barclays’ Annual results for 2008, the Financial Times writes:
“The bank confirmed it had written down its exposures to complex debt instruments by £8bn in 2008, though the impact was reduced by a £1.66bn gain it booked from the reduced value of its own debt.”
My immediate thought was: surely that report cannot be true. When your market-traded debt becomes worth less because the market considers you less creditworthy than before, and prices your debt to reflect that perception of increased default risk, this does not add to your profits - it simply makes you a worse credit risk.
This is mark-to-market gone mad. It ignores the fact that, if there really were any higher current or future profits from the decline in the valuation of the debt because of higher default risk premia, these profits would have to be paid out as debt service: holders of Barclays’ debt have a claim on its resources that is senior to that of its profit claimants (see also the last section of this post).
As I understand it, should a debtor try to repurchase his own debt at the discounted market price, this would constitute an act of default. I ran into this problem all the time during the years I worked regularly on emerging markets and developing countries. Dodgy sovereigns would issue debt or borrow from banks. If and when the sovereign turned out to be non-creditworthy, the debtor government frequently tried to sneak behind the backs of the IMF and the other multilateral organizations to buy back its own bonds (or the by then often securitized bank loans) at a discount. This was not permitted under the rules of the sovereign borrowing game, although it did happen. It was a good boondoggle for the borrower. First you borrow and spend the proceeds. Then you convince the world (your creditors in particular) that you are a terrible credit risk. Your creditors run for the exit and agree to sell your debt back to you at a discount, all without any formal default or bankruptcy procedures.
Clearly, reducing the face value, notional value or contractual value of your outstanding debt by paying off part or all of it in accordance with the normal terms of the debt contract, does reduce your outstanding liabilities.
Surely, neither the accounting rules in the UK nor Barclays would be silly enough to mark to market capital gains or losses on contractual obligations like notes and then count the losses (gains) as contributions to profits (losses)?
So I delved into the Barclays PLC Results Announcement Figures 2008, and there it was. The FT’s report was correct: Barclays had gone well beyond making a silk purse out of a sow’s ear, and had transmogrified an adverse market judgment on the development of its creditworthiness into a contribution to profits.
“Group profit before tax was £6,077m, down 14% on 2007. Profit included:
- Gains on acquisitions of £2,406m, including £2,262m relating to Lehman Brothers North American business
- Profit on disposal of the closed life assurance book of £326m
- Gains on Visa IPO and sales of shares in MasterCard of £291m
- Gross credit market losses and impairment of £8,053m
- Gains on own credit of £1,663m”
The ‘surely they could not be quite that stupid’ inner voice kept me going deeper into the entrails of the Results. And yes, they could be, because on page 7 of its results announcement, it reads:“Barclays Capital was affected by very challenging market conditions in 2008, with income falling by £1,888m (27%) on 2007, reflecting gross losses of £6,290m relating to credit market assets, partially offset by gains of £1,663m on the fair valuation of notes issued by Barclays Capital due to widening of credit spreads and £1,433m in related income and hedges.” (underlining added by me (WHB)).
At that point I checked whether I had taken the tablets this morning, and yes, I had.
What this means is that Barclays PLC results for 2008 contain a contribution to profits of £1.66 bn that is completely spurious from an economic, financial, commercial and common sense perspective.
What else could be wrong?
If the market’s declining valuation of Barclay’s creditworthiness is recorded in the accounts as a contribution to profits, it makes you wonder what else in these accounts makes no sense. In the year since 31-12-2007, the size of the balance sheet has increased from £ 1,227 bn to £ 2,053 bn. Much of this massive increase is accounted for by almost matching increases in derivative financial instruments of over £ 700 bn on both the asset and liability side of the balance sheet. There were just under £45 bn of derivative financial assets whose valuations were based on unobservable inputs (internal models etc.). Just over £14 bn of derivative financial liabilities had their valuations based on unobservable inputs.
Following the crisis, I have adopted the rule: if it is unobservable, it is not believable.
Despite the massive increase in the size of the balance sheet, the value of the assets held in the most transparently valued asset categories has declined: trading portfolio assets by £ 8bn and financial assets held at fair value by £35 bn. More assets are held in the ‘available for sale financial investments category’. These are held at fair value on the balance sheet, but changes in fair value are not reflected in the profit and loss accounts.
With very few exceptions, banks now use every means at their disposal to hide financial embarrassments on of off the balance sheet for as long as possible. Rigorous mark-to-market valuation without managerial discretion as to whether to shift assets from one valuation bucket to another is a partial solution. Unfortunately, the IASB lost first its nerve and then the plot in response to pressure from those exposed to toxic and dodgy assets. Banks can now drive a coach and horses through fair value principles and release what information they want when they want it.
Declining market valuation of creditworthiness as a source of profits, again
Assume I have a debt of £1000 at face value with a ten year maturity. Against the law, it is secured against my future labour income. I have no financial assets, nor do I acquire any over the rest of my life. The risk-free nominal interest rate is zero. My creditors have complete confidence in my ability to pay (until they find out that I cannot). My debt contract requires me to pay a coupon of £100 at the end of each of the ten years. I have a wage income of £150 per year and a subsistence level of consumption of £50 per year. First assume the debt is a loan from the bank. It is not traded or priced.
No sooner have I signed the loan agreement, taken and consumed the money (at the very beginning of year 1), when the unexpected news arrives that I will die for sure at the end of year five of the loan. I pay my first five £100 annual instalments and join my ancestors. The loan goes into default. In present discounted value terms the bank loses £500. According to Barclays’ accounting standards, I make a £500 profit when the news of my untimely demise arrives. It does not feel like it. Where are the additional income, the additional resource flows and the additional consumption permitted by the increased profit corresponding to the reduced present discounted value of my loan?
Now assume that instead of a bank loan held to maturity by the issuing bank, my debt is a tradable note with the same cash-flow profile. Before the news of my untimely demise, the note trades at £ 1000. When the news hits, the value of the note falls to £500. Since the contractual debt service on the note has priority over my profits, the capitalised value of the shortfall of the actual debt service from the contractual debt service is not available as profits or income to me. If there were any surplus income over the £150 I earn for the five years I have to live (£50 of which goes for subsistence and £100 to debt service), it would go to make up the debt service shortfall, up to the point where the contractual terms are met in full.
In Barclays’ accounting universe, a bank can walk away from its (traded) debt and distribute the resulting debt service savings as profits. That is insane. These ‘profits’ do not exist. The only interesting question remaining is whether it is just Barclays’ accounting standards or UK accounting conventions for banks in general that are off the wall.
Willem Buiter
Accounting according to Barclays:
declining creditworthiness as a source of profits
诚信和声望-消失了的利润源泉 金融时报2月9日
英国的会计准则何在？巴克莱PLC的会计规则何在？
作者：Willem Buiter
金融时报对巴克莱公司２００８年业绩的报告中说，“银行已确认该公司因复杂债务工具导致的减计损失达８０亿英镑，不过由于它的自身债务减计（１６．６亿英镑），该公司的总损失相应减少。”
我看过以后的第一个想法就是：这个报告肯定是不对的。如果你的上市交易的债务价值下降，那肯定是因为市场认为你的声望较之先前下降了；市场对你的债务的定价，所反映的是预计中的违约风险上升，这不会增加你的利润，只会更加提高你的信用风险。
这个“标价－出售”的市场在发疯。它无视这个事实：如果真的从债务价值贬损中会发生当前或未来利润的增加，而其原因却是支付了更高的违约风险金，那么这种利润首先是要用来清偿债务的。手握巴克莱公司债务的债权人比收取利润的人有更加优先的权力要求偿付（可参见本栏上期评论）。
根据我个人的理解，一个负债人以折扣价回购自己的债务，应该被视为违约行为。我在新兴市场和发展中国家工作时，总是在面对这种问题。不负责任的统治者会自己发行债务或者去向银行借钱。如果这个统治者失信，负了债的政府通常会躲在ＩＭＦ以及别的多国机构背后，把自己的债务（或者届时已经证券化了的债务）买回来，价格已经打过折扣。在一个君主举债的游戏规则中这样做是不允许的，但是却发生过。对于举债的一方来说，这不过是一种雕虫小技。你先去借钱花钱，然后让世界相信（特别是你的债权人）你有极大的风险。你的债权人急于离场，同意把债务折扣以后再出售给你。无需任何正式的违约破产程序。
当然，按照借贷合同规定，偿付一部分或者全部债务，减少债务的面值、实值或者合同规定的价值，肯定会降低负债水平。而且，不论是英国的会计准则还是巴克莱公司，都不会愚蠢到规定了资本损益条款之后，又把损失计算成利润，或者把利润记为损失吧？
正是由于这个道理，我去仔细读了巴克莱公司２００８年的报告和数字。我看到，财经时报没有说错：巴克莱真的把朽木雕成了玉器，它真是把市场对于它的声望的不利评价改写成了获利的助推力。请看：
“税前集团赢利60.77亿英镑，比2007年下降14％。利润包括：来自自有资本的收益24.06亿英镑，其中含来自雷曼兄弟的北美业务22.62亿英镑；到期付清的人寿保险账户赢利3.26亿英镑；来自信用卡ＩＰＯ和出售万事达信用卡股份赢利2.91亿英镑；信贷市场总损失80.53亿英镑；来自自身信贷的收益16.63亿英镑。”
我心中回响着的一个声音 “他们不会那么蠢”，推动我更深地进入该报告的深处。但是真的就是这么愚蠢，在它的年度报告第7页上写着，“巴克莱资产在２００８年的非常挑战性的市场上遭受损失，收益比２００７年下降18.88亿（27％），源于信贷市场的资产损失总额达62.9亿英镑，但部分被巴克莱资产公司发行的拓宽信贷领域的票据抵消达16.63亿英镑，此外还有相关收入及对冲减损达14.33亿英镑。”（底划线由作者所加）
我们看到，巴克莱公司２００８年的收益中，有16.6亿英镑的利润，是违反了经济学、金融学、商学和普通人常识的。
还有什么弄错了？
如果巴克莱公司真的可以把丢失信誉导致的市值下降计为利润，那么你会更想知道在这份会计报告中是否还有什么不合常理的东西。从2007年12月31日以来的一年中，该公司的平衡表上的资产规模从1.277万亿英镑增长到2.053万亿英镑，资产和负债两方都增加了差不多相等的7000亿英镑之巨，全都是来自金融衍生手段。在资产一方，有将近450亿英镑的金融衍生资产的估值是基于不可见的投入品（内部模型等），在债务一方，则有140多亿英镑的衍生金融的估价是基于不可见的投入。
在这次危机中，我信奉的是这样一条规则：如果是不可见的就一定是不可信的。
资产平衡表上的总价值巨增之时，最透明的资产价值项目却是缩减的：交易组合资产缩减80亿英镑，以平准价格持有的金融资产缩减350亿英镑。更多的资产记在“待出售金融投资项目”之下。而且平衡表上这些以平准价值持有的资产，其平准价值的变化却没有在损益表上注出。
除了极少数例外，现在所有的银行都在尽力长久地隐藏财务上的困境。在财务的管理上，确定待出售的财产如何改变估价，是一个部分解决问题的方法。不幸，领航者首先失了方寸，面对隐藏有毒资产和带有欺诈成分的资产的压力，难以拿出方略。
银行现在（其实）可以套上一匹马拉的车向前好好走，遵循平准定价的原则，并适时发布应当发布的信息。
把信誉评价损失再当一次利润来源
假定：我负有现值为1000英镑的１０年期债务。我没有遵循通常的法律（以财产抵押），而是把这笔债务抵押在我的未来劳动收入上。我没有金融资产，也不会在未来的有生之年得到金融资产。无风险的利率为零。我的债权人对于我按时偿债的能力具有完全的信心（直到他们发现我没有能力之前）。我的债务合同规定每年年末偿付100英镑；我的工资收入为每年150英镑，生存水平的年消费额为50英镑。首先假定此债为银行贷款，不能交易也没有价格。
刚刚签订了借贷协议，得到了并且花出了借来的钱（第一年之初），无法预料的消息告诉我只能再活５年了（到第５年末）。我还过五次（分期付款）钱之后，就回到了祖先那里。这笔借款发生了违约。以现价（折扣－利率为零没有折扣）计算银行损失500英镑。根据巴克莱的会计标准，我在预知死亡的时候获得了500英镑利润。但是感觉上并非如此。后来的收入、资源的流动、后来的消费都在哪里呢？本来依据折扣过的贷款现值，这些都是应该会实现的啊。
现在再假定，出借的银行不想等待贷款最终到期，我的债务变成可以交易的（一张票据），对现金流的规定不变。这张票据最初在没有关于我的健康信息时可以卖1000英镑。当消息披露时这张票据的价值降至500英镑。由于合同规定的借贷收益拥有的优先权超过我的获利权，于是实际债务的资本化了的价值减损，就不能成为我的利润或者收入。如果在我存活的５年中每年150英镑的收入在偿债和消费之后还有剩余，剩余就应该用来偿付债务中不能最终归还的部分，直到还清。
然而在巴克莱的会计天地里，一个银行可以从这种债务交易的麻烦中抽身走开，还可以把债务的缩减称为利润。这是荒谬的。这样的“利润”根本就不存在。最后，唯一还值得提出的问题是：这是否仅仅是巴克莱的会计准则，或者是英国的会计常规？还是大家都在这么干？
Willem Buiter
Professor of European Political Economy, London School of Economics and Political Science; former chief economist of the EBRD, former external member of the MPC; adviser to international organisations, governments, central banks and private financial institutions.
Accounting according to Barclays: declining creditworthiness as a source of profits
February 9, 2009 Financial Times
Either accountancy rules in the UK are generically nuts, or Barclays PLC’s accounting conventions are idiosyncratically nuts, or both are (nuts, that is).
In its report today on Barclays’ Annual results for 2008, the Financial Times writes:
“The bank confirmed it had written down its exposures to complex debt instruments by £8bn in 2008, though the impact was reduced by a £1.66bn gain it booked from the reduced value of its own debt.”
My immediate thought was: surely that report cannot be true. When your market-traded debt becomes worth less because the market considers you less creditworthy than before, and prices your debt to reflect that perception of increased default risk, this does not add to your profits - it simply makes you a worse credit risk.
This is mark-to-market gone mad. It ignores the fact that, if there really were any higher current or future profits from the decline in the valuation of the debt because of higher default risk premia, these profits would have to be paid out as debt service: holders of Barclays’ debt have a claim on its resources that is senior to that of its profit claimants (see also the last section of this post).
As I understand it, should a debtor try to repurchase his own debt at the discounted market price, this would constitute an act of default. I ran into this problem all the time during the years I worked regularly on emerging markets and developing countries. Dodgy sovereigns would issue debt or borrow from banks. If and when the sovereign turned out to be non-creditworthy, the debtor government frequently tried to sneak behind the backs of the IMF and the other multilateral organizations to buy back its own bonds (or the by then often securitized bank loans) at a discount. This was not permitted under the rules of the sovereign borrowing game, although it did happen. It was a good boondoggle for the borrower. First you borrow and spend the proceeds. Then you convince the world (your creditors in particular) that you are a terrible credit risk. Your creditors run for the exit and agree to sell your debt back to you at a discount, all without any formal default or bankruptcy procedures.
Clearly, reducing the face value, notional value or contractual value of your outstanding debt by paying off part or all of it in accordance with the normal terms of the debt contract, does reduce your outstanding liabilities.
Surely, neither the accounting rules in the UK nor Barclays would be silly enough to mark to market capital gains or losses on contractual obligations like notes and then count the losses (gains) as contributions to profits (losses)?
So I delved into the Barclays PLC Results Announcement Figures 2008, and there it was. The FT’s report was correct: Barclays had gone well beyond making a silk purse out of a sow’s ear, and had transmogrified an adverse market judgment on the development of its creditworthiness into a contribution to profits.
“Group profit before tax was £6,077m, down 14% on 2007. Profit included:
- Gains on acquisitions of £2,406m, including £2,262m relating to Lehman Brothers North American business
- Profit on disposal of the closed life assurance book of £326m
- Gains on Visa IPO and sales of shares in MasterCard of £291m
- Gross credit market losses and impairment of £8,053m
- Gains on own credit of £1,663m”
The ‘surely they could not be quite that stupid’ inner voice kept me going deeper into the entrails of the Results. And yes, they could be, because on page 7 of its results announcement, it reads:“Barclays Capital was affected by very challenging market conditions in 2008, with income falling by £1,888m (27%) on 2007, reflecting gross losses of £6,290m relating to credit market assets, partially offset by gains of £1,663m on the fair valuation of notes issued by Barclays Capital due to widening of credit spreads and £1,433m in related income and hedges.” (underlining added by me (WHB)).
At that point I checked whether I had taken the tablets this morning, and yes, I had.
What this means is that Barclays PLC results for 2008 contain a contribution to profits of £1.66 bn that is completely spurious from an economic, financial, commercial and common sense perspective.
What else could be wrong?
If the market’s declining valuation of Barclay’s creditworthiness is recorded in the accounts as a contribution to profits, it makes you wonder what else in these accounts makes no sense. In the year since 31-12-2007, the size of the balance sheet has increased from £ 1,227 bn to £ 2,053 bn. Much of this massive increase is accounted for by almost matching increases in derivative financial instruments of over £ 700 bn on both the asset and liability side of the balance sheet. There were just under £45 bn of derivative financial assets whose valuations were based on unobservable inputs (internal models etc.). Just over £14 bn of derivative financial liabilities had their valuations based on unobservable inputs.
Following the crisis, I have adopted the rule: if it is unobservable, it is not believable.
Despite the massive increase in the size of the balance sheet, the value of the assets held in the most transparently valued asset categories has declined: trading portfolio assets by £ 8bn and financial assets held at fair value by £35 bn. More assets are held in the ‘available for sale financial investments category’. These are held at fair value on the balance sheet, but changes in fair value are not reflected in the profit and loss accounts.
With very few exceptions, banks now use every means at their disposal to hide financial embarrassments on of off the balance sheet for as long as possible. Rigorous mark-to-market valuation without managerial discretion as to whether to shift assets from one valuation bucket to another is a partial solution. Unfortunately, the IASB lost first its nerve and then the plot in response to pressure from those exposed to toxic and dodgy assets. Banks can now drive a coach and horses through fair value principles and release what information they want when they want it.
Declining market valuation of creditworthiness as a source of profits, again
Assume I have a debt of £1000 at face value with a ten year maturity. Against the law, it is secured against my future labour income. I have no financial assets, nor do I acquire any over the rest of my life. The risk-free nominal interest rate is zero. My creditors have complete confidence in my ability to pay (until they find out that I cannot). My debt contract requires me to pay a coupon of £100 at the end of each of the ten years. I have a wage income of £150 per year and a subsistence level of consumption of £50 per year. First assume the debt is a loan from the bank. It is not traded or priced.
No sooner have I signed the loan agreement, taken and consumed the money (at the very beginning of year 1), when the unexpected news arrives that I will die for sure at the end of year five of the loan. I pay my first five £100 annual instalments and join my ancestors. The loan goes into default. In present discounted value terms the bank loses £500. According to Barclays’ accounting standards, I make a £500 profit when the news of my untimely demise arrives. It does not feel like it. Where are the additional income, the additional resource flows and the additional consumption permitted by the increased profit corresponding to the reduced present discounted value of my loan?
Now assume that instead of a bank loan held to maturity by the issuing bank, my debt is a tradable note with the same cash-flow profile. Before the news of my untimely demise, the note trades at £ 1000. When the news hits, the value of the note falls to £500. Since the contractual debt service on the note has priority over my profits, the capitalised value of the shortfall of the actual debt service from the contractual debt service is not available as profits or income to me. If there were any surplus income over the £150 I earn for the five years I have to live (£50 of which goes for subsistence and £100 to debt service), it would go to make up the debt service shortfall, up to the point where the contractual terms are met in full.
In Barclays’ accounting universe, a bank can walk away from its (traded) debt and distribute the resulting debt service savings as profits. That is insane. These ‘profits’ do not exist. The only interesting question remaining is whether it is just Barclays’ accounting standards or UK accounting conventions for banks in general that are off the wall.
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