March 5 (Bloomberg) -- You almost never hear companies complain about squishy valuations that result in large gains. Make them report huge losses, though, and there's no end to the corporate whine-a-thon about fair-value accounting.

The growing refrain from financial-services companies goes something like this: Yes, we had billions of dollars in losses on derivatives pounded by the subprime-mortgage mess. Those, however, were non-cash, mark-to-market losses, and only estimates at that. The market is so illiquid, we can't get actual price quotes. Besides, we think the market has gone insane and that the losses will reverse over time. Everything will be fine.

(See important boilerplate below, disclaiming everything we just said.)

It's a nice story line, with an obvious flaw. From American International Group Inc. to the bond insurers MBIA Inc. and Ambac Financial Group Inc., these companies' executives don't know any better than you do if the values of their holdings will rebound. The safest route for investors is to assume they won't.

Just as banks never expose ``rogue traders'' who made them money, about the only time companies decry the inadequacies of accounting rules is when their own ox gets gored.

Few corporate executives complained during the late 1990s when energy traders such as Enron Corp. were stuffing their earnings with non-cash gains from black-box mathematical models. A few years later, when the accounting-rule makers decided to finally treat stock-option pay as an expense, high-technology companies such as Intel Corp. and Cisco Systems Inc. screamed bloody murder about the imprecision of off-the-shelf valuation models. Fortunately, they lost that argument.

True Economics

There really are no new accounting debates, only new investors. Like clockwork, every time some industry gets hit with catastrophic losses, executives whimper about how the numbers don't reflect the true economics of their businesses. And we get Page 1 stories like the one on March 1 in the Wall Street Journal, saying ``Accounting Rules Blasted as Dow Falls.''

What we have here isn't an accounting problem. It's an economic one: Losses soared at AIG and the like, even if management can only ballpark the amounts. And the companies' financial positions weakened. At least this time, the rules made sure investors were informed somewhat promptly.

Think what the headlines would be if companies didn't have to mark their derivatives to fair value each quarter. ``Companies Hide Losses,'' the story might go. ``Accounting Rules Blasted as Values Ignore Reality.''

To be sure, as with all good public-relations spin, there is some truth to the aggrieved companies' protestations.

Swap Valuations

The financial instruments in question at AIG, Ambac and MBIA are credit-default swaps, which work in practice like insurance. Customers buying protection get paid only if there's a default or similar loss on the credits being insured.

Yet because these deals are structured as derivatives rather than pure insurance contracts, they must be marked at fair value under the rules. So, companies have to record any swings in value each quarter, including large losses, even if they think they ultimately won't have to pay their customers anything. Just because the risk of default went up, for instance, doesn't mean a given collateralized debt obligation, or CDO, will miss any interest payments.

Yet investors who ignore fair-value losses are taking a great risk. Illiquid or not, the market is signaling that the likes of AIG, Ambac and MBIA will have to pay huge claims on these contracts.

Unchanged Values

An alternative would be to let companies keep their derivatives' values unchanged on the balance sheet until the final moment of settlement, which could be years away. And what if the companies eventually wound up paying billions of dollars in claims? Investors rightly would complain they were blindsided.

AIG last quarter marked down its portfolio of ``super senior'' credit-default swaps by $11.5 billion, saying it expects the ``unrealized market valuation losses to reverse over the remaining life.''

Watch the bouncing jargon, though, as Gimme Credit LLC analyst Kathleen Shanley noted in a report last week. In December, AIG said it was ``highly unlikely'' the company would have to pay any claims on these derivatives. AIG revised that on Feb. 12, saying any realized losses ``will not be material.'' Then on Feb. 28, it got more cautious. It said any realized losses would ``not be material to AIG's consolidated financial condition, although it is possible that realized losses could be material to AIG's'' future earnings in any given quarter.

$5.2 Billion

Ambac recorded $5.2 billion in mark-to-market losses on credit swaps for the fourth quarter. It stressed that just $1.1 billion of that was for impairments on CDOs where Ambac believes it ``will have to make claim payments'' in the future.

MBIA, which like Ambac is struggling to keep its AAA credit rating, had $3.4 billion in similar markdowns last quarter, though its losses didn't deter value investor Martin Whitman from upping his stake in MBIA recently to 10 percent. In a March 3 letter to shareholders, MBIA said these ``are not predictive of future claims and, absent further credit impairment, will totally reverse over time.''

Perhaps they are right, which is another way of saying maybe the market is wrong and that it's just a matter of time before the rest of the world figures out how much smarter these companies' executives are than the rest of us.

Investors can choose for themselves what to believe. At least they were warned.

(Jonathan Weil is a Bloomberg News columnist. The opinions expressed are his own.)

To contact the writer of this column: Jonathan Weil in Boulder, Colorado, at jweil6@bloomberg.net

Last Updated: March 5, 2008 00:59 EST