With the mist beginning to clear after the American elections, it’s time to observe how countries differently observe the holiday known to some as Halloween.
In the US, children canvas their neighbors for candy – a ritual seemingly designed to benefit pediatric dentists, aerobic instructors and obesity consultants.
In France, Toussaint mainly presents an excuse for a ten-day school holiday. While in Germany, the souls of the dead supposedly walk the earth on Allerheiligentag until released when the church bells chime.
This season in Germany was particularly uneasy for the departed spirits of dependable financial reporting, transparent governance and stable market regulation, with ominous implications for the elusive goal of global convergence toward good-quality reporting and compliance standards.
All Hallows Eve saw Deutsche Bank report quarterly net income of € 414 million – thanks only to the bank’s avoidance of € 845 million in asset write-downs made possible by the reclassification of € 25 billion of loans originally intended for onward sale. The change was enabled by the success of the European banks in lobbying the accounting regulators for relief from the “mark-to-market” rules for impaired loans, if permissibly treated instead as “held to maturity.”
Doubtless a precursor to similar ghoulish accounting by equally motivated banks across Europe, the D Bank move will only be credibly testable over the collection life of the underlying loans – assuming of course that the bank itself is around that long. Investors are essentially being asked to take on considerable faith the ability of bank management to wave the wand of reclassification and stir up ultimate value out of a witches’ cauldron incapable of valuation by more rigorous standards.
Among others, Tom Selling at The Accounting Onion has inveighed against the readiness of the International Accounting Standards Board to rationalize such witchcraft. Deutsche Bank’s eager adoption in practice is a signal that the IASB's accommodationism will unloose malign spirits across the accounting landscape.
The same week saw Porsche’s trick-or-treat on the hedge funds, who were caught by the extent of its option-based creeping take-over of Volkswagen. Plunging short the ordinary shares of VW and long its preference shares, a herd of funds are said to be squeezed as much as € 20 billion by their self-inflicted need to cover with a free float of less than 6%.
Meanwhile the financial sorcery of Porsche chief Wendelin Wiedeking, by which the company made three times more last year in options trading than it did building cars, has him the highest-paid warlock in the German corporate coven.
Shed no tears for the hedge funds who walked into Porsche’s strategy. But do be concerned for the wrong-footed German regulators, who will be scrambling to plug the loopholes that permitted the stealth accumulation of control over VW by way of cash-settled options not disclosable under BaFin’s presently porous rules.
And it cannot be reputation-building for Deutsche Börse, that it reacted to the run-up in VW’s stock price, reaching fully 27% of the Dax-30 index, by making a one-time adjustment to put a 10% cap on the company’s weighting.
The very essence of a credible index – stability of constituent components and adjustments that are infrequent, predictable and transparent – is traduced by such ad hoc fiddling.
These recent events in Germany remind investors and other financial information users of an inevitability: creative and agile corporate chieftains will run ahead of their slower-witted over-seers. When regulation comes too late and standard-setting yields to pressure, it’s no surprise that the nightmares are real: creepy things lurk in dark corners, never to be reached by the disinfectant of sunshine.
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