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Lehman Style Capital Adequacy Valuation Scams Just Won’t Die…Why the Big Surprise?


On 30th July 2003 John Edge the Chairman of the International Valuation Standards Committee wrote to the Bank of International Settlements on the subject of Capital Adequacy pointing out:

…”without proper rules on asset valuation any capital adequacy assessment is bound to be misleading”…  

…without more accurate asset valuation and provisioning, capital and capital adequacy figures are seriously flawed”.



Now…Err…the penny is starting to drop…in perfect slow motion just exactly as was predicted.

The recent story of Lehman where CCC bonds were "removed" temporarily from the balance sheet is just one example of how to cheat investors and regulators, I wouildn't be surprised if the "transactions" were used to take a mark-to-market snapshot at teh same time.

So the valuations of assets used to calculate capital adequacy were (1) misleading (2) seriously flawed.

Didn’t everyone know that was going on in 2003?

By-the-way BIS did not respond to the letter from IVSC (well at least their response was not on their web-site), so presumably they and all the other Central Bankers and regulators all over the world knew perfectly well that all the valuations used to assess capital adequacy were just a pile of Andersen-scented pig-manure.

And they still are.

Talk about Alice in Wonderland and the Mad Hatter.

One of these days I suppose that someone is going to suggest that there is adult supervision of the banking system, like insisting that assets are valued using IVS.

Until then I’m sticking with my tried & tested methodology of doing a valuation of a bank (given that the audit-reports and stress tests are meaningless).

1: Take a Big Picture of the CEO.

2: Show it  to your dog

3: If your dog wags huis tail- everything is fine!


Disclosure: "No Positions"