Professor to Wall Street: You're Doing Swaps Accounting Wrong

  • Banks use a broken method for derivative trades, paper argues
  • `If you follow the math you can’t reach any other conclusion'

A Wall Street sign is displayed outside the New York Stock Exchange (NYSE) in New York.

Photographer: Michael Nagle/Bloomberg
Lock
This article is for subscribers only.

The world’s largest banks are incorrectly accounting for their swaps trades, locking up money that could otherwise be paid out as dividends to their shareholders, according to a bold new academic paper.

The transactions are funded with money that’s borrowed from the bank’s treasury, and currently that lending cost is deducted from the value of the derivatives. That’s a mistake, according to Darrell Duffie, one of the report’s authors who argues banks should instead charge their trading partners more up-front for the deals, freeing up cash.