Valuation and fundamentals

The aim of this article is not to provide a comprehensive overview of the financial crisis that began a year ago. This has already been done quite extensively and in a neat way, in particular by Borio (2008), Brunnermeier (2008), Crouhy et al. (2008) and Calomiris (2008) among others, who all describe and analyse the numerous triggers and mechanisms through which the crisis unfolded and spread to the main developed financial markets. Instead, we would like to focus on what we believe is one of the core issues of this crisis and which has not been addressed yet: valuation. Valuation is at the interplay between market dynamics, economic behaviour, accounting standards and prudential rules. The multiple, and even systemic –as far as the current episode is concerned–interactions between all these elements, associated with the inability of market participants to value complex financial instruments in illiquid/stressed markets, have resulted in a fi nancial meltdown that is already considered by many observers as the worst financial crisis since the Great Depression.