Some blame the rapacious lenders. Others point to the deadbeat borrowers. But Stephen A. Schwarzman sees another set of culprits behind all the pain in the financial industry: the accountants. That’s right, the bean counters.
The case presents a strong rebuttal of a general tendency of blaming the accountants for every evil in the society. The case specifically refers to Mr. Stephen Schwartzman, co-founder of US private equity called Blackstone Group. Schwartzman has been extremely critical of the introduction of fair value accounting measurement and blames it to be the “culprit” to cause some US banks to collapse and thus triggering the 2008 Global Financial Crisis (GFC). It raises some critical issues and heated debates. Read the above case, examine the arguments and counter-arguments, and research other relevant materials to answer the following questions in your own words:
1. Why does Schwartzman blame accountants as another set of culprits behind all the pains in the US financial industry arising from the 2008 global financial crisis? Do you share his views? Why?
2. It is suggested in the case that the (Fair Value) rule forces banks to mark their assets and liabilities to market, rather to some theoretical price calculated by a computer – a system often derided as “mark to make-believe.”
– What valuation practice by banks is referred to as the “mark to make-believe”? Why is it called as such?
3. What is the ‘sub-prime’ crisis? Why is it called “sub-prime”? How did the sub-prime crisis affect US banks? Do you think Australian banks might also have been exposed to the ‘sub-prime’ issue?
4. What do you know about Collateralized Debt Obligations (CDOs)? How did Fair value measurement system affect their valuation by banks? Do you believe that Fair Value measurement system contributed to the banking crisis? Why?
5. Mr. Schwartzman argued that “the market is somehow wrong or wildly inefficient”. Why did he make such comment? Did the US capital market efficiently price the CDO’s? What does it say about the capital market?