Understanding the mark-to-market meltdown

March 03, 2008

New accounting rules designed to improve transparency and disclosure were bound to increase noise on financial institutions’ balance sheets. But now they are adding to the credit crunch.

Download table: ABX prices imply savage loss severity ($ bln): Loss given default – expressed as percentage of mortgage amount

Credit valuations service sector heats up

How do you mark to market?

The accounting farce that’s gone beyond
a joke

INSURANCE GROUP AIG, UK mortgage lender Bradford & Bingley, and wealth manager and investment bank Credit Suisse would at first glance have little in common except that they fall under the broad bracket of ‘financial institutions’.

But in the space of a few days in February, the firms found themselves in similar – and uncomfortable – situations.

First, Bradford & Bingley’s management – already fending off speculation that it would be the next UK lender to fail after Northern Rock – announced write-downs of more than £250 million ($500 million) on a range of SIVs, CDOs and hedging instruments. It made it clear that it did not agree with the accounting treatment of these securities insisted upon by its auditor.

Then AIG raised estimated losses on mortgage-related instruments from $1 billion to $5 billion.