-238-
FNBC adjusts midmarket value by the presumed market value of
future administrative costs, reestimates the value each period,
and reduces or increases income by the change in value is
consistent with mark-to-market accounting. We do not believe
that the procedures used by FNBC reflected fair market value.
2. Incremental Costs
FNBC calculated its administrative costs adjustments by
using fully allocated costs. The Court-appointed experts
testified that the administrative costs’ impact on the value of a
swap is no more than the marginal (incremental) costs to
administer the swap. We agree. FNBC’s method is incorrect in
that only incremental costs affect fair market value.
In contrast to fixed costs such as general overhead costs,
the incremental costs of a swap are the additional costs
associated with acquiring the swap. FNBC’s approach, which used
general overhead from its other departments as part of its
administrative costs adjustment, is wrong. For a dealer of
swaps, general overhead is not an incremental cost. General
overhead generally consists of the costs that would occur whether
or not additional swaps would be acquired. When a dealer is
considering whether to acquire a swap, only incremental costs
would affect the prices at which the dealers would be willing to
trade by reducing the present value of the cashflows associated
with acquiring the swap.
Page: Previous 228 229 230 231 232 233 234 235 236 237 238 239 240 241 242 243 244 245 246 247 NextLast modified: May 25, 2011