How Lehman Profit Proved Absurdity of Fair Value Accounting
Letter to the Editor
Alex J. Pollock | Financial Times
September 24, 2007
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We learn from "Lehman Results Bring Cheer to Wall Street" (September 19) that Lehman improved its reported profits because of new accounting rules "allowing it to book as profits the reduction in value of some of its debt."

In other words, if the "fair market value" of your debt goes down--perhaps because the bond market considers you a worse credit risk--while you owe exactly the same amounts to your creditors as you always have, you can then declare a "profit." The "fair value" accounting theorists have thereby arrived at absurdity.

Alex J. Pollock is a resident fellow at AEI.

About the Author

 

Alex J.
Pollock
  • Alex Pollock joined AEI in 2004 after thirty-five years in banking. He was president and chief executive officer of the Federal Home Loan Bank of Chicago from 1991 to 2004. He is the author of numerous articles on financial systems and the organizer of the “Deflating Bubble” series of AEI conferences. In 2007, he developed a one-page mortgage form to help borrowers understand their mortgage obligations. At AEI, he focuses on financial policy issues, including housing finance, government-sponsored enterprises, retirement finance, corporate governance, accounting standards, and the banking system. He is a director of the CME Group, the Great Lakes Higher Education Corporation, the International Union for Housing Finance, and the chairman of the board of the Great Books Foundation.

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  • Phone: 2028627190
    Email: apollock@aei.org
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