Dear Lord, seriously, this person teaches economics?

Third, and for me most tellingly, the article is wrong. Of course most bank loan portfolios are valued at cost. What else would you value them at? They are assets, and very few people choose to repay more than they are lent, in which case cost is the maximum value at which they might be stated in most accounts.

Is he actually that much of an ignorant?

He has, I suppose, heard of the concept if interest? Which is something additional which people pay over and above the amount they borrow. And, if it’s a fixed rate of interest (as would often be true of bonds) then the capital value can indeed rise above cost if interest rates fall.

True, loans tend not to be at fixed rates of interest. But they can certainly be at fixed premia to a floating rate. And if the company’s credit rating improves it may well be that the premium doesn’t change. Producing a loan which should righteously be valued at above cost if we are to gain a true and fair view.

True, that last is somewhat specialist. But the idea that loans can only ever be at cost and no more because people don’t pay back more than what they borrow is just ridiculous.

12 thoughts on “Dear Lord, seriously, this person teaches economics?”

  1. Bank loans are assets? Don’t they get listed as cash in the assets column of a balance sheet, with an equivalent entry under notes payable in the liabilities column?

  2. It was dispiriting to read that there is no way the ICAEW would strike off Murphy for his apparent ignorance of fundamental accounting principles. A deeply deranged individual who needs sectioning for his own benefit as well as that of wider society as a whole.

  3. Mr Newman, for a bank, the loan is an asset. For the customer, it is a liability and, on receipt it will be held as a cash asset while waiting for it to be used in a purchase

  4. It is interesting that our superhero potato manages to contradict himself several times in the same paragraph, sometimes even in the same sentence.

    “Given that it is known that a certain percentage of all advances will fail, even if specific detail is not known, general provisions against loans should always be made from the moment that a sum is advanced”

    “The problem is that they should not be stated at less than cost because provisioning is entirely possible”

    So he argues that loans should be held at cost, that specific provisions are impossible to computr, but that general provisions should always be made. It is all too random for me

  5. And unlikely it will be held at cost. The capital valuation rules have caused plenty of problems for financial institutions even before the crash.

  6. It’s fun that Spud has disparaged Art Laffer’s directorships as some friends of mine have asked him to list his own directorships so we could compare.

    He keeps deleting the requests.

  7. Bank loan portfolios will be held at *cost less provisions*. Some loans don’t get repaid or are only partially repaid. The bank does not value at cost loans where it knows it will not be repaid in full. Lloyds Bank, for instance, has made provisions of £2.2 *billion* against its loan portfolio.
    Murphy was, once upon a time, an accountant.

  8. Is there an equivalent to the Golden Raspberries for outstanding moronic twattery in economics? May be pointless though when you know the same person is going to win it each time.

    Fair play to Arthur Laffer for agreeing to a debate with Murphy that Laffer could never have any hope of winning. He seems to be a genial guy, in stark contrast to the irascible Murphy.

  9. It is a well known fact that the value of floating rate loans generally rise over their lives. Assume company A borrows a ten year loan at LIBOR + 100 bp. Five years later be the loan has a remaining term of five years and company A’s alternative cost of borrowing for that term is LIBOR + 50 bp. Hence the outstanding loan has higher market value than its book value.

  10. Murphy has never exhibited the slightest indication that he understands Present Value of an annuity/perpetuity. I wonder if he is even aware of the notion of a geometric series.

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