Generali's Thread of Doom

Generali

ad9898 wrote: »

Excellent post, Generali, it might be doom but unfortunately it's fact, and better that we all know about it, we might all miss NDG on here, but your contributions are without peer.

Thank you. That's a really kind thing to say.

I think the biggest bit of news is Queensland's debt being downgraded. That worries me as the extra costs to the UK if her debt was similarly downgraded would be substantial.

Wookster

Generali wrote: »

It's true.

Unfortunately, we look like we're going to have a bit of a problem. Most companies have shortfalls in their defined benefit pension schemes and at some point they will have to plug the gap. As they can't borrow right now, that'll have to be done by cutting the dividend. That makes a problem for all the other funds and it becomes self fuelling cycle.

Unfortunately accounting standards also have some part to play in this: where a company operates a defined benefit scheme they are obliged to recognise the fully loss and report it in the financial statements. In recessionary climates, losses can be enormous => investors don't want to buy shares as there is a gaping pension deficit => share price drops => value of pension deficit grows.

Pensions are a very real enormous problem, to which no one has an answer. And the irony is that the UK is better placed then most of Western Europe!

Also on the topic of accounting standards I have to moan about IAS 39: Financial Instruments: Recognition and Measurement. The idea of valuing all financial instruments at market prices seems logical but when an instrument is held for long term, why not value it at the present value of future cashflows? I know there is some degree of judgement here but surely the judgement factors should be reported in the accounts for a user to review.

chucky

and there was me just getting ready to pile into the Thai market - thanks for the heads up Generali

bubblesmoney

Wookster wrote: »

Unfortunately accounting standards also have some part to play in this: where a company operates a defined benefit scheme they are obliged to recognise the fully loss and report it in the financial statements. In recessionary climates, losses can be enormous => investors don't want to buy shares as there is a gaping pension deficit => share price drops => value of pension deficit grows.

Pensions are a very real enormous problem, to which no one has an answer. And the irony is that the UK is better placed then most of Western Europe!

Also on the topic of accounting standards I have to moan about IAS 39: Financial Instruments: Recognition and Measurement. The idea of valuing all financial instruments at market prices seems logical but when an instrument is held for long term, why not value it at the present value of future cashflows? I know there is some degree of judgement here but surely the judgement factors should be reported in the accounts for a user to review.

but who knows what these future cash flows will be. if i want a loan i get assessed based on my present earnings and asset base and the banks make a valuation as to my credit worthiness. if i want a remortgage then the banks will mark to present market valuation of my house (or worse if a new build) and not use a projected market value 30y down the line for the same house.

as it is the banks have shown very poor judgement in their investment revenue forecast, rather than getting income they are facing severe losses. so the mark to model valuations should value their debts worse off than a mark to market model going by their investment return track record !!!

in what way are the banks assets and debts different for assessing their credit worthiness? why should the banks get a more favourable model for assessment as to their credit worthiness.

Wookster

bubblesmoney wrote: »

but who knows what these future cash flows will be. if i want a loan i get assessed based on my present earnings and asset base and the banks make a valuation as to my credit worthiness. if i want a remortgage then the banks will mark to present market of my house (or worse if a new build) and not use a projected market value 30y down the line for the same house.

The simple answer is that no one knows *exactly* what any sort of asset will yield however they probably can work out a pretty reasonable guess, to be sense checked by the auditors. As to claims about banks not being trustworthy well, there was an article in the Indy that stated that 80% of RBS's high risk activity originated from 500 people, 80% of which have left.

I think that some of these accounting policies work when you have a working, perfect market but the reality is markets are like pendulums - they oscillate between two extremes, apparently not in equilibrium.

BlondeHeadOn

"Generali's thread of Doom"

This title was the first thing I read when I opened MSE this morning - and for some reason it just made me laugh out loud! Not because I don't agree with everything that you say Generali, but because it so sums up the mood I am in after listening to the Today programme for an hour and opening the BBC website.

I think maybe I should stop listening to and reading the news for a day or two, and spend a day tidying up the garden and admiring the crocuses and listening to the birdies. Or something.....

Thank you Generali for making me laugh in spite of (as well as because of) the doom and gloom this morning!

:T :T :T

bubblesmoney

Wookster wrote: »

The simple answer is that no one knows *exactly* what any sort of asset will yield however they probably can work out a pretty reasonable guess, to be sense checked by the auditors. As to claims about banks not being trustworthy well, there was an article in the Indy that stated that 80% of RBS's high risk activity originated from 500 people, 80% of which have left.

I think that some of these accounting policies work when you have a working, perfect market but the reality is markets are like pendulums - they oscillate between two extremes, apparently not in equilibrium.

leaving it to the auditors discretion in valuations is asking for trouble as every major banking fraud / accounting scam involved previous big5 accountants passing the fictitious accounst for years (enron et al). there should be no discretion allowed in marking to market, anything else is just asking for trouble where valuations are coooked up in the clouds using fancy equations without any basis in reality

purch

Excellent post, Generali

your contributions are without peer

Not because I don't agree with everything that you say Generali

Thank you Generali

It's a real 'lurve fest' this morning:eek:

I thought Valentines Day was last week !!!!

Generali

purch wrote: »

I thought Valentines Day was last week !!!!

It's the time difference.

Wookster

bubblesmoney wrote: »

leaving it to the auditors discretion in valuations is asking for trouble as every major banking fraud / accounting scam involved previous big5 accountants passing the fictitious accounst for years (enron et al). there should be no discretion allowed in marking to market, anything else is just asking for trouble where valuations are coooked up in the clouds using fancy equations without any basis in reality

You raise an important point: yes there have been big scandals, however thus far they have been concentrated to the US which has a much more prescriptive rule based set of accounting rules. Until IFRS the UK was much more principle based where the auditors have been much more involved in the accounting policies rather than the box ticking exercise in the US.

The difference is in a wildly complex rule based environment you have very expensive lawyers navigating through gaps in the rules, where as in the UK it has always been more about the principles involved and the judgements taken.

Otherwise how do you get around the fact that some of these accounting policies (around pensions and financial instruments in particular) simply do compound market movements? If there is no effective market, as is the case now, then assets are written down to firesale values, despite the fact that many of those assets will yield significant cashflows - it creates a downwards spiral.