Or could it be that the process of selling the bank publicly would shine too much sunlight onto the worthless derivative paper being held by the bank?
“In addition, Northern Rock enters into certain derivative contracts, which although efficient economically, cannot be included in effective hedge accounting relationships. Consequently, although the implicit interest cost of the underlying instrument and associated derivative are included in net interest income in the income statement, future fair value movements on such derivatives are recorded in “Net hedge ineffectiveness and other fair value gains and losses” on the face of the income statement and are excluded from underlying results.”
The snippet above is from Northern Rock’s report on its performance in the 1st half of 2006
My interpretation of the snippet above: “We are going to count any income from these derivatives as an asset but hide all the losses via accounting legerdemain.”
