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The Relaxation of Mark-to-Market May be Stiffening

Posted by Larry Doyle on July 23, 2009 2:07 PM |

I have always thought the relaxation of the mark-to-market accounting standard by the Federal Accounting Standards Board (FASB) was nothing more than a vehicle for banks to ‘cook their books.’

Is the grill getting ready to be turned down, if not totally turned off? Kudos again to Bloomberg’s Jonathan Weil for his cutting edge review and analysis of major accounting issues and their impact on our financial industry. Weil reports, Accountants Gain Courage to Stand Up to Bankers:

The Financial Accounting Standards Board is girding for another brawl with the banking industry over mark-to-market accounting. And this time, it’s the FASB that has come out swinging.

It was only last April that the FASB caved to congressional pressure by passing emergency rule changes so that banks and insurance companies could keep long-term losses from crummy debt securities off their income statements.

Now the FASB says it may expand the use of fair-market values on corporate income statements and balance sheets in ways it never has before. Even loans would have to be carried on the balance sheet at fair value, under a preliminary decision reached July 15. The board might decide whether to issue a formal proposal on the matter as soon as next month.

I am truly heartened (yet simultaneously shocked) that the FASB would choose to pick this fight with the financial industry and their Congressional counterparts at this time. Washington has unequivocally laid out a plan to ‘buy time’ for financial institutions, and in turn the economy, to recover. This proposal, Financial Instruments: Improvements to Recognition and Measurement, would certainly promote transparency while likely exposing real problems within financial institutions.

Weil provides further piercing insights:

“They know they screwed up, and they took action to correct for it,” says Adam Hurwich, a partner at New York investment manager Jupiter Advisors LLC and a member of the FASB’s Investors Technical Advisory Committee. “The more pushback there’s going to be, the more their credibility is going to be established.”

The scope of the FASB’s initiative, which has received almost no attention in the press, is massive. All financial assets would have to be recorded at fair value on the balance sheet each quarter, under the board’s tentative plan.

This would mean an end to asset classifications such as held for investment, held to maturity and held for sale, along with their differing balance-sheet treatments. Most loans, for example, probably would be presented on the balance sheet at cost, with a line item below showing accumulated change in fair value, and then a net fair-value figure below that. For lenders, rule changes could mean faster recognition of loan losses, resulting in lower earnings and book values.

What would this rule change have meant for CIT?

The commercial lender, which is struggling to stay out of bankruptcy, said in a footnote to its last annual report that its loans as of Dec. 31 were worth $8.3 billion less than its balance sheet showed. The difference was greater than CIT’s reported shareholder equity. That tells you the company probably was insolvent months ago, only its book value didn’t show it.

What does the banking lobby think of this proposed rule change?

“I guess the nicest thing I can say is it’s difficult to find the good in this,” Donna Fisher, the American Bankers Association’s tax and accounting director in Washington, told me.

Weil concludes:

If the bankers don’t like it, that’s probably a good sign the FASB is doing something right.

Sense on Cents concurs and will be monitoring developments very closely. Thank you Mr. Weil.

LD

  • Pip Daddy

    WHAT??? NO! How will we continue to support this false rally if the banks can’t continue to report awesome earnings with minimal questions asked?

    I’d say wait for the markets to double-bottom sometime in the middle of 2010 before taking massive short positions on the dollar.






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