Market-Value Accounting Debate Roars On

The on-going debate about the pros and cons of market-value accounting rules got louder last week after American International Group (AIG) reported a Q4 loss of $5.29 billion on the heels of an $11.12 billion pre-tax write-down on the value of mortgage-related investments. The stock market shuddered at the news, which analysts consider partially responsible for the ensuing 315 point drop in the Dow.

Shortly after AIG’s announcement, Credit Suisse Group reported similar news: It announced that it expects to take close to a $3 billion write down on financial instruments negatively impacted by the credit crunch, which it anticipates will mean a $1 billion drop in quarterly profit.

Such big write-downs by financial institutions have tongues wagging about the appropriateness of rules that require companies to take such write-downs (AIG’s write-down, for example, may never result in an actual charge to the company because they don’t plan to sell at the current price). Critics of market-based rules argue that they create a domino effect, The Wall Street Journal reports: The market drops off, forcing companies to take write-offs, which pushes the market lower, causing more write-offs.

But nobody can come up with a better pricing model; regulators fear that models that don’t consider market value could result in another drop in investor confidence and even greater market turmoil (look at what Enron’s valuation practices brought about).

Accounting and finance regulators are in store for some lively discussion -- especially if bank failures result from a market debacle.