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 (OTCQX:BNPQY) 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.