Citi’s CFO (C) whacked the stock yesterday by saying the firm will likely need to take more writedowns. Why? In part because market conditions continue to deteriorate. And in part because no one really knows what all that crap on Citi’s balance sheet is worth (especially you), and accounting rules allow Citi to say they’re worth whatever Citi wants them to be worth.
In the old days, valuing the “assets” on bank balance sheets wasn’t an issue. Now, with the recent profusion of exotic debt instruments, securities, and derivatives. it is.
Most banks value securities using “Fair Value Accounting,” which assigns a value based on what the current market would be willing to pay for the asset. This is really what any asset is worth, so it makes sense. Citi CFO Gary Crittenden, however, says Fair Value Accounting isn’t fair, since market prices in a distressed environment don’t reflect the asset’s true value. And he’s now going to value Citi’s assets using internal “models.” NYT:
Marking the book, as the industry calls the pricing process, has become one of the more controversial topics among finance executives, even in instances where no fraud has been alleged. On Thursday, the chief financial officer of Citigroup said the company would use internal models to price mortgage bundles known as collateralized debt obligations rather than use the dismally low market prices as the only factor. On the other end of the spectrum, firms like Goldman Sachs say that market prices should be the driving factor in pricing.
Marking to market is tough. But it’s better than the alternative. Given that Citi and other big financial firms have already destroyed almost all of their credibility, we’d rather know what the market thinks Citi’s assets are worth than what Crittenden thinks they are worth. But we’re not going to get to.