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November 21, 2011



I don't think fair value helps without describing what it's a fair value of. If the asset and liability positions inherent in the repo are hung up on the balance sheet everyone can see the size of the punts (and a repo's just a leveraged punt) being run.

With better disclosure of the underlying investments and the cash (by way of margin calls) and income sensitivities based on market movements the readers are better able to assess the risks.


I think you may have missed one rational on the repo to maturity. In addition to being structured to evade the effective control definitions, it was at least nominally meant to deal with the risk issue. You write about the danger of the "obligation to pay a fixed amount of cash for a security whose future value is uncertain." Historically, the value at maturity of AAA European sovereign debt has been pretty predictable -- its just the principle. So if the main fluctuation in the value of a debt instrument is due to changes in interest rates rather than repayment expectations, then repo to maturity would be somewhat safer.

If European governments did not default on their debt in the next year, then MF Global would have been fine letting the repo run to maturity. My understanding is that the MF Global position blew up when there was a margin call (or the repo equivilent, whatever that is called) as the market value of the underlying securities fell. This was the failure. The repo to maturity concept made it look immune to market fluctuations when in fact it was not.

There is nothing about this that changes your conclusions, of course. Even with your suggested disclosure, the current treatment is absurd. As a minimum, if one is subject to margin calls based on changes in value of a security, that should certainly trigger "effective control" should it not?

Independent Accountant

I saw you quoted in the WSJ. Congrats. I have awaited this type of fiasco too. My suggestion: leave the accounting alone and let PWC get sued over this and pay say $500 million. Maybe that will learn 'em. The substance and form of the transactions seems clear enough to me.


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