Bank One Corporation - Page 165

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               We disagree with petitioner’s assertion that FNBC took only            
          two of the available adjustments.  Although FNBC labeled its                
          adjustments solely as credit adjustments and administrative costs           
          adjustments, Duffie noted that FNBC took three, and maybe four,             
          of the adjustments listed in the G-30 report.  FNBC included an             
          adjustment for hedging within its administrative costs adjustment           
          and may have included an adjustment for funding and cost of                 
          capital within the administrative cost adjustment.                          
          XI.  Respondent’s Method of Accounting                                      
               Respondent determined that FNBC was required to report its             
          swaps income by valuing its swaps at their midmarket value and              
          not reporting any adjustments thereto; e.g., for credit risk or             
          administrative costs.  Petitioner argues that respondent’s method           
          is erroneous in that it fails to reflect FNBC’s swaps income                
          clearly.  Petitioner notes that virtually everyone who has                  
          considered the valuation of swaps has rejected respondent’s                 
          position that the fair market value of a swap is its midmarket              
          value.                                                                      
               We agree with petitioner that the midmarket method, standing           
          alone, fails to reflect FNBC’s swaps income clearly.  Midmarket             
          is the value of the payments but not the value of the swap                  
          contract in that FNBC must incur administrative costs and bear              
          the risk that a payment might never be received.                            








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