FASB Market to Market Changes Make Bank Stocks Black Holes

Today, the Financial Standards Accounting Board (FASB), under pressure from financial companies and politicians, voted to relax fair-value, mark to market rules.  Now, banks can decide for themselves how much loans and other assets on their books are worth. Gee, that sounds like a really great idea.

According to a Bloomberg article:

"The changes to so-called mark-to-market accounting allow companies to use “significant” judgment when gauging the price of some investments on their books, including mortgage-backed securities. Analysts say the measure may reduce banks’ writedowns and boost their first-quarter net income by 20 percent or more. FASB voted on the rules at a meeting today in Norwalk, Connecticut. "

The banks argue that they shouldn't have to write down the value of assets just because there is no current market for that asset.  For example, they might not be able to sell a mortgage backed security but it may still be producing cash.  As a result, it's value should't be $0.  The problem is, this flies in the face of a market system.  If  the market is pricing the security at $0, then that's what its value is.  The banks benefited greatly when these securities were increasing in value and they could mark the assets up every quarter.  And when the markets do eventually recover, as they will, the mark to market rules will help banks.

But allowing banks the discretion of valuing their own assets has many downsides.

Lynn Turner, the former SEC chief accountant said on Bloomberg TV  that banks came in with "bags of money to do a hit job on FASB."  He doesn't believe that the changes in fair market valuation solve the problem of banks holding billions in bad loans.  "It just creates a veneer of profitability."  He also believes that we are creating a Japan-like situation where losses are spread over a longer period of time, keeping banks close to insolvent and unable and unwilling to lend.  In his word, these changes create "less management, less accountability, and less transaprancy."

He is not alone.  Former SEC chairmen Arthur Levitt and William Donaldson  have joined several others to form the Investors’ Working Group, a non-partisan panel formed to recommend improvements to regulation of U.S. financial markets.  Levitt released a statement saying "The group is deeply concerned about the apparent FASB succumbing to political pressures, which prevent U.S. investors from understanding the true obligations of U.S. financial institutions."

The bottom line is this.  Banks, which have shown they are incapable of pricing assets and managing risks, are now going to have more latitude in pricing the crap they hold on their balance sheets.  I say stay away.  It's clear it's just another tactic by the financial powers that be to preserve their own companies and wealth at the expense of shareholders and the tax paying public.

Sam Cass
Sam Cass: Sam Cass, MBA, JD, University of Texas at Austin. Always a fan of Leonardo Da Vinci.

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