Wall Street Chic by Josh Persky
You’ve just been bailed out. You and your buddies are getting hefty bonuses for basically losing billions of middle class pensioners’ dollars. Question: What do you wear to the Big Bonus Luncheon at 21? Do you go with the bespoke Kiton that screams “this cost $22, 500,” or do you sport a navy pinpoint Kenneth Cole that you scored on Overstock.com for $135 with free shipping? This moral question is not addressed by Josh Persky in this installment of “Wall Street Chic” but stay tuned.
The History of Mark to Market accounting Part 2 By Josh Persky
Historical-cost-based financial statements also allowed financial institutions to engage in gains trading.
In this situation management could opportunistically choose which assets to sell, or which liabilities to settle, in order to realize gains (or losses) in particular accounting periods. This afforded management a powerful income statement management tool.
In addition, for financial institutions short of capital, this created an incentive for the management to sell their well-performing assets in order to realize gains to boost their capital, but retain their poorly-performing assets (which had unrealized losses).
The change in the business environment during the 1980s also provides the backdrop that is necessary to understand the progress of fair value accounting. Historically, many financial institutions did not have dynamic risk management strategies and would rarely sell investments before their maturity. Deregulation of interest rates during this period caused a change in the strategies of financial institutions, and securities positions were traded more actively.
New financial instruments were created in response to changes in the market, such as deregulation, tax law changes, volatility, and other factors. U.S. GAAP for such changes in financial instruments was being developed on an issue-by-issue basis. For example, accounting literature issued included SFAS No. 52, Foreign Currency Translation, issued in 1981, which required fair value accounting for certain foreign exchange contracts through the income statement and SFAS No. 80, Accounting for Futures Contracts, issued in 1984, which required futures contracts that do not qualify for hedge accounting to be measured at fair value through income.