Wall Street banks fear losing to Allied Capital, they are creating a sequel to David Einhorn's "Fooling some of the people all of the time"... this time, it's called "Fooling yourself all of the time". As usual, it involves accounting that do not reflect reality (Bloomberg has more).
People will buy and sell assets at discounted prices, so asset value should be marked-to-market to manage risks. If you can tough it out without selling the asset, you can mark it back up when the value recovers. But mark-to-market helps you understand and control your risks.
On the liability side, $1 of debt will always be $1. No one will let you get away by paying only $0.50 - they will wrestle the other $0.50 from you at the first opportunity they get. What if you buyback the bonds you issued at $0.50? Well... if you had the financial resources, the bonds probably won't be priced at $0.50 to begin with.
Accounting is meant to reflect the realities of the business. Common sense (and conservatism) should prevail when accounting assumptions and decisions are made. But what did Wall Street do? They threw common sense out of the window!
Oh wait... common sense was never in Wall Street to begin with.
Fooling yourself all of the time
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