Monthly Archives: March 2009

Accountants to Cause the Banking Crisis


Via Martin Varsavsky, I find a WSJ article where Steve Forbes gives a provoking view on the roots of the Banking Crisis. Mark-to-market or “fair value” accounting for financial institutions was re-established in 2007 in USA. The Financial Accounting Standards Board (FASB) rules that the balance sheet must reflect the “market” value of the financial assets.

With the market value of financial assets  falling after the system credibility crisis, banks are dragged close to bankruptcy only due to the need to account for assets at today’s market valuation.

Quoting Mr. Forbes:

Regulatory capital by its definition should take the long view when it comes to valuation; day-to-day fluctuations shouldn’t matter. Assets should be kept on the books at the price they were obtained, as long as the assets haven’t actually been impaired.

Mark-to-market accounting does just the opposite. When times are good, it artificially boosts banks’ capital, thereby encouraging more investing and lending. In a downturn it sets off a devastating deflation.

Mark-to-market accounting is the principle reason why our financial system is in a meltdown. The destructiveness of mark-to-market — which was in force before the Great Depression — is why FDR suspended it in 1938. It was unnecessarily destroying banks.

And a proof point of this thesis can be that while American banks like Citibank are near-bankrupt, other banks in Europe like Santander, less exposed to American accounting rules, seem healthier even though the fundamentals of Spanish economy are much worse than in US.

Markets are so volatile that the idea to use them for accounting is a recipe for system instability.

Take Santander stock price as an example. Why Santander PER is currently 4 (with a 11% yield), when during last 7 years it had always been above 20, with a mere 2% yield? Which valuation is “fair” for accounting? the one of last 7 years? or that of last 7 months? Isn’t the valuation just reflecting how optimists or pessimists are investors? should “optimism” be accounted in the books??

Economics is far from exact science, and it is remarkably incapable of predict, sometimes even explain a posteriori, events such as the current crash. What we know from economists is that people expectations are the most reliable indicator to predict the growth or slow down of economic activity. The credibility of the financial system is now below limits. Fear (panic) to a banking system collapse is reducing consumer spending, companies forecasts are revisited and unemployment surges as companies prepare for the downturn. A vicious circle that the accounting rules strangely help accelerate.

An accounting system based in market valuations, under the current gloom, makes the simple possibility of bankruptcy a self-fulfilling prophecy. 

Boxee: Hulu’s Dilemma

Boxee is getting so successful that many of its users are seriously considering to stop their Pay-TV subscriptions.

Boxee is a cool open source software for Media Centers based on Mac or Ubuntu. This software transforms a Mac Mini, Apple TV or any Linux small-form PC into a social network  set-top-box. With a great user interface, Boxee enables you to enjoy on your TV not only your media library but also online video such as YouTube and Hulu, as you interact with your buddies.

Hulu -the joint venture of NBC Universal and News Corp- offers a sensational online catalog of  TV shows from their parent companies and others, that has made their user growth in 2008 stunning.

Such is the success of the Boxee-Hulu combination that Hulu’s content providers have requested Hulu to be removed from Boxee,  in an attempt to stop cannibalizing their traditional revenues from TV ads and Cable networks.

Again the traditional Innovator’s dilemma in front of a disruptive threat. Innovate first and cannibalize yourself? or wait and risk to be eaten by others with less to lose?

NBC and News Corp might worry about Online TV in the short-term, but in the long-run it will ony bring good news:

  • CPM of Online TV should be higher than traditional TV. As marketers say, “Half the money I spend on advertising is wasted; the trouble is I don’t know which half”. Online TV ads can be targeted to specific viewers.  Interactive responses can be measured. That should  reduce wasted ads, and therefore advertisers will be ready to pay more for an Online TV Ad.
  • Online TV might display less ads per show than traditional TV, but ads are at least seen.  A way to avoid all the wasted ads wiped out by DVRs and Tivos.
  • Online TV can enable Content Providers to sell subscriptions for premium content and VoD directly to the user without any Cable intermediary.

If Hulu is able to build a stronghold in online TV, they will capture all the benefits of a richer online TV in the long-run.

The ones to worry about Boxee are the Cable and IPTV operators that will need to ad significant value to avoid being by-passed by over-the-top solutions such as Boxee, and dumped by their customers. There is time. Boxee is great, but still for Mac or Linux geeks, a minority.

“The question is not whether Telcos want to be a dumb or a smart pipe. They are already a dumb pipe. The question is do they want to be something else on top?”

Max Foresite – Telecom, Internet & Media Analyst