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Wall Street – Washington: “Pay to Play”

Posted by Larry Doyle on June 3, 2009 7:46 AM |

In my opinion, the relaxation of the FASB’s (Federal Accouting Standards Board) mark-to-market rule was nothing more than a vehicle to allow banks to “cook their books.”  The “cooking” of the books put the burner on a low simmer in order to allow the banks sufficient time to generate earnings. Those new earnings can and will be used to offset the currently embedded losses on the toxic assets still residing in the banking industry.  

The FASB did not relax their accounting rule without enormous pressure applied by both the Wall Street and Washington chefs.  The Wall Street Journal reports, Congress Helped Banks Defang Key Rule:

Not long after the bottom fell out of the market for mortgage securities last fall, a group of financial firms took aim at an accounting rule that forced them to report billions of dollars of losses on those assets.

Marshalling a multimillion-dollar lobbying campaign, these firms persuaded key members of Congress to pressure the accounting industry to change the rule in April. The payoff is likely to be fatter bottom lines in the second quarter.   

I have numerous questions and comments on this topic, including:

1. If this accounting rule was so insidious, why was “mark-to- market” accounting ever enacted in the first place?  

Sense on Cents: As with any accounting rule, the “mark-to-market” was implemented to create transparency.

2. Are the toxic assets still on the bank books?

Sense on Cents: Most definitely. They are merely being masked via this relaxation.

3. Banks maintain the toxic assets don’t actively trade and, when they do, they trade at levels not reflective of their true values.

Sense on Cents:  These assets have traded everyday and at levels assuming a heightened level of future defaults on the underlying mortgages. If the banks believe the market levels are not reflective of true value, then why haven’t they and global investors raised the funds to purchase these massively undervalued securities? Investors trust the market assumption of future defaults.  

The WSJ reports:

Earlier this year, financial-services organizations put their lobbyists on the case. Thirty-one financial firms and trade groups formed a coalition and spent $27.6 million in the first quarter lobbying Washington about the rule and other issues, according to a Wall Street Journal analysis of public filings. They also directed campaign contributions totaling $286,000 to legislators on a key committee, many of whom pushed for the rule change, the filings indicate. 

4. Wall Street paid approximately $28 million in contributions and lobbying to effect this accounting change. The banks made these payments while in receipt of billions of dollars of TARP funds (taxpayer/ government assistance). Did Wall Street effectively utilize taxpayer funds in order to “pay” Washington so the banks could continue “to play” their game?

Sense on Cents: In my opinion, most definitely!!

5. How long had the “mark-to-market” been in effect prior to its relaxation?

Sense on Cents: Decades. It worked just fine.

6. Why didn’t banks lobby in the 2000-2006 era that assets were being overvalued via this accounting standard?

Sense on Cents: Bank executives were being “paid” from those inflated valuations. 

7. Given that the banks now utilize internal pricing models to value the toxic securities, are those models and their embedded assumptions made public so investors can have some degree of transparency?

Sense on Cents: NO!! Why would the banks want the “cooking” exposed?

In summary, this version of “pay to play” will be seen as a watershed event in the Brave New World of the Uncle Sam economy. Why will future economic growth underperform? The banking industry will be forced to continue to set aside reserves against the embedded toxic assets. In so doing, the banks will have less credit to extend to consumers and business.


For more on this topic, I submit:

Putting Perfume on a Pig
April 2nd; post written the day FASB relaxed the mark-to-market standard

Freddie Mac, Fannie Mae Deja Vu?
May 28th; post highlighting the massive embedded losses in the Federal Home Loan Bank system. These losses are masked by the relaxation of the mark-to-market.

Legalized Bribery
February 16th; post highlighting Chuck Hagel and Leon Panetta implicating Washington politicians’ endless pursuit of money. 

How Wall Street Bought Washington
March 9: post highlighting the massive money spent by Wall Street to curry influence in Washington.

  • coe

    LD – it seems to me that the accounting slant is one additional angle of the prism through which the banks operate, and as you point out, there are ways that the principles create arbitrage opportunities as well as perspective is that transparency and accuracy is the intended goal, and that is best achieved through an honest mark-to-market discipline, but the plain and political facts are that the standard setters have only been on a slow boat to China in trying to impose this discipline on the banking system and this effort is facing tremendous resistance on the journey ..the key elements of the M-T-M debate started with the securities portfolio requirements under FAS115 in the 90s – and even there the banks were given the three options to book their activity as trading, available-for-sale, or held-to-maturity with different requirements and results built in…then the FASB took a shot via FAS133 to force a similar discipline on the derivative activity, only in doing so gummed up the rules for hedge accounting and forced/allowed banks to work the seams in many ways…in more recent years these standards have been tweaked and “clarified” and most recently we have experienced the new adventures attendant with FAS157 and the dreaded “OTTI” (Other Than Temporary Impairment) penalties of forcing the write-down of assets where current valuations have fallen big time..
    The reason I toss this history into the accounting stewpot is that on another level, the banks have never really been given a shot to mark-to-market their best “assets”, i.e. their deposits…which tend to be sticky and do indeed provide some natural offset to the declining values of the asset exposures when rates start to back up..asymmetry may be a good thing in modern art or haute couture, but it just isn’t fair in modern accounting!

    Let’s face facts – banks (and all market participants across all industries for that matter) operate their businesses across a multi-dimensional backdrop that affects decisions – there’s the actual economic realities to contend with, there’s the regulatory standards to finesse, there’s the competition to consider, there’s the legislative meddling to react to, there’s the individual competencies and business plans to pursue, there’s the myriad levels of compensation platforms that also drive personal behavior, there’s the varied cultures of the companies to believe in and/or abandon, there’s the varied skill sets of the Boards, the executive management teams, and the key business leaders that frame success, and for sure, there’s the anomalies and pleasures and pains of an asymmetrical and complex accounting system to navigate.

    Truth is, there’s so many pots on the stove, there’s a whole lot of “cooking” underway! You again have it nailed on the asset side, but all of us have created a mess in the kitchen when one or more of the pots boil over…tough topic – well explained, LD

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