Consequences of Accounting During the 2008 Financial Crisis
Group 3 October 4th, 2011

Actors in the 2008 Financial Crisis

 U.S. Government  European Union o Commission o Political figureheads  Banks o U.S. o E.U.  International Accounting Standards Board (IASB)  Investors and External Regulators

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Actors in the 2008 Financial Crisis (US Government)

o Generally mentioned indirectly in the news articles o Not in the forefront of the case, as banks were driving policy o Presumably, wanted to allow U.S. banks to appear and remain competitive In the case of the financial crisis, being competitive meant not showing large losses on financial reports. Therefore, some leniency in accounting (e.g., use of Fair Value Accounting “FVA”) was allowed. Specific mechanism: move an asset from balance sheet (where assets must be valued at market price) to bank book until “maturity” of the assets

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Actors in the 2008 Financial Crisis ( European Union „Commission & Figureheads“ ) European Commission o Reluctant to change accounting rules o Technical advisory International Accounting Standards Board (IASB) did not see FVA as a legitimate accounting technique o Agreed to FVA only under political pressure E.U. Figureheads (i.e., heads of state) o Initially, wanted to rely on advice of IASB o After the collapse of AIG and increasing use of FVA by banks in U.S., the EU figureheads had to allow banks in E.U. to have the same tool for their financial reports as banks in U.S. o Allowed FVA in order to avoid putting E.U. banks at a competitive disadvantage

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Actors in the 2008 Financial Crisis (Banks „US & EU“) Banks in General o Wanted to use “fair value” accounting (FVA): value illiquid assets using historical prices Justification: keep assets on balance sheet at historical prices assuming historical prices