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Prof to Wall Street: You're doing swaps accounting wrong

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(Bloomberg) The world’s largest banks are incorrectly accounting for their swaps trades, locking up money that could otherwise be paid out as dividends to their shareholders, according to a bold new academic paper.


The transactions are funded with money that’s borrowed from the bank’s treasury, and currently that lending cost is deducted from the value of the derivatives. That’s a mistake, according to Darrell Duffie, one of the report’s authors who argues banks should instead charge their trading partners more up-front for the deals, freeing up cash.


By calling out Wall Street accounting conventions, Duffie is in familiar territory. The Stanford University finance professor has already helped spur changes in how banks value credit risk and debt. This time, he’s targeted a business worth many trillions of dollars, where even tiny accounting shortcomings can add up to serious money.


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