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October 24, 2011

Fairyland value accounting

“Try this on your credit card company: your creditworthiness has weakened, so you write down the value of what you owe them to reflect the greater risk that you will not pay it all back and credit the difference to your personal income. That is exactly what accounting allows; the five big US banks – Citigroup, Bank of America, JPMorgan, Morgan Stanley and Goldman Sachs – have just reported gains equivalent to more than four-fifths of their quarterly $16bn net profit as a result of falls in the value of their own debt and credit standing. Now European banks are set to report with the same system.”

“This is wrong. “Fair valuing” of their own debt and other credit instruments produces fantasy profits that will not be realised.”

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