BNP Paribas plays the canary role
I hadn’t thought of this particular approach (see earlier post “Accountants are failing investors with ‘fair value’ accounting“, Aug 6-07), but French bank BNP Paribas (BNP:EPA) has decided that it needs to come clean about the value of some of its investments. It seems BNP has three funds containing asset backed securities. The mark-to-market value was once around US$2 billion. But today, given the mayhem in the credit markets, BNP is the first global firm to state the obvious: we don’t know what these funds are worth.
Honesty is always the best policy.
This from the WSJ:
“The complete evaporation of liquidity in certain market segments of the U.S. securitization market has made it impossible to value certain assets fairly regardless of their quality or credit rating,” BNP Paribas said in a statement.
As a result, the bank said it would suspend three funds, Parvest Dynamic ABS, BNP Paribas ABS Euribor and BNP Paribas ABS Eonia, which are in total valued at around €1.5 billion ($2.07 billion), a spokesman for the group said. All funds combined at BNP Paribas Investment Partners are worth more than €350 billion.
“The situation is such that it is no longer possible to value fairly the underlying US ABS assets in the three above-mentioned funds” and “therefore unable to calculate a reliable net asset value, NAV, for the funds,” the company said.
A few days ago I questioned the consistency and utility of fair value accounting in general, and particularly as it was being applied in the subprime CDO universe. Is it fair to say that BNP’s auditors, Deloitte and PriceWaterhouseCoopers, agree? Given that the press release actually referred to the “fair value” concept (“value fairly”), the accounting approach was likely at the forefront of everyone’s mind at BNP.
Canadian investors would probably like to know what CIBC’s (CM:TSX) accountants (E&Y) have to say about this news, but I would imagine that they’re in a meeting right now, trying to determine what BNP’s decision means, if anything, to their client.
Wouldn’t you be shocked if BNP was the only bank with either Deloitte or PWC on the audit team that came to this determination? BNP’s shares are down 4% so far today on the news, shedding E2.8 billion of market value on a press release involving US$2 billion of ABS funds. And the Dow futures are pointing down 92 as a result. Perhaps some enterprising bank analysts should figure out which other FIs share the same auditors, and cross-reference against those with subprime exposure?
I’d gladly do it, but my real job beckons.
MRM
Hopefully your job doesn’t require you to work off of the facts and get the story straight before spouting off.
You do realize that fairly valuing assets for fund valuation purposes and “Fair Value” under FAS 159 are two separate things right? You also realize that FAS 159 is an election under GAAP, not a requirement. Seriously, look it up. Or I can do it for you since you appear to be too lazy to do so.
http://www.fasb.org/pdf/fas159.pdf
For you to pound on this canard that if you want GAAP statements, you must use fair value is inaccurate and ridiculous. Quite frankly casts doubts about your seriousness in researching and understanding the subject.
Well have fun doing whatever it is you really do for a living. Hopefully it’s not managing money.
One final note since you are quite obviously not Wellington Asset Management and are based in Canada, Canadian GAAP may be different.
Nice to hear from you.
We are based in Canada, this is true. And I don’t recall getting the speech from our accountants that anything other than fair market value accounting was a real option if we wanted GAAP statements.
As for the differences betweeen French accounting standards relating to fund pricing and the GAAP approach to fair market value, my point was more straightforward than that, I admit.
If you think that BNP’s auditors weren’t cognizant of the basic fair market value accounting approach, I certainly have no inside information to convince you otherwise. The fact that the BNP press release referred to their inability to “value fairly” the portfolio is striking, however.
MRM
Canadian equivalent is Section 3855 which unlike the forthcoming FAS 159 is not optional. Don’t know French standards, but being unable to calculate simple NAV of various funds does raise the legitimate concern of what “accounting” impact (if any) would this have at the parent level. Regardless of the accounting impact, the market impact is already self-evident…
Okay, so how are accountants the culpable party here? I hate my auditors with a passion that burns hotter than 1000 suns, but to blame them for this seems a bit reactionary. What would be the proposed fix to fair value accounting? Do you find historical cost basis more relevant? In that case, the accountants would not be in the same sentence as BNP because I doubt fund investors would allow NAV to be computed on a historical cost basis.
It’s well and good to criticize but if you don’t have a solution in mind you’re just bitching. So enlighten me, how do you feel management should best reflect the value of financial assets on the balance sheet and increases in value on the income statement?
And lest you think that auditors are closing their eyes and singing la la la to avoid some of the shortcomings with fair valuation here’s something to chew on:
http://www.ey.com/global/content.nsf/International/Assurance_-_IFRS_-_How_Fair_is_Fair_Value
There are readily acknowledged difficulties with fair value for illiquids, but as I asked previously, do you have anything better?
Here is one scenario.
You have a private co. investment. Share was priced at $1. Next investor invests at $1.50. GAAP fair value acounting says that you need to write-up the investment you own by the 50 cents. Even though it is a private co. and there is no liquid market to sell that share in. And no liquidity discount can be applied.
If it was a public co. with a $1.50 quote and a $1 cost base they’d require you to do the same. How are the two securities worth the same on the financial statements, when only one can be sold?
As for private equity firms valuing the notional in-the-money value of gains on private investments and bringing that into income – and paying promote on it – that’s just silly.
MRM