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12th Street Capital Reviews FASB 166 and 167 and Tells Us Why Wall Street Will Need More Capital

Posted by Larry Doyle on November 4, 2009 12:00 PM |

Money makes the world go round. Right now the world is not going around all that well because there is neither sufficient capital nor sufficient demand for capital from a global standpoint. That said, profits and bonuses are back on Wall Street so they must have sufficient capital, right? Not so fast.

While our wizards in Washington and on Wall Street are projecting an image of ‘come on in, the water’s fine,’ a crowd based in Norwalk, Connecticut has plans that hold major implications for our markets and economy. What crowd is this? The Financial Accounting Standards Board, otherwise known as FASB.

Recall that last spring Congress, supported by a heavy influence from Wall Street, rammed through a relaxation of the FASB’s accounting rule requiring fair value mark-to-market accounting. Regardless of what you think of that  legislation, I think there is no doubt that the change allowed banks to mismark a wide array of assets and forestall losses.  The need for the accounting rule change could be and will be debated ad nauseum. I believe the powers that be at FASB felt emasculated in the process.

Fast forward and let’s review the next major piece of accounting legislation emanating from FASB. That being FASB 166 and 167.  I will admit I am no accountant, but I understand enough about the markets and accounting to know that the implementation of these rules, scheduled to go into effect in January of 2010 (in November 2009 for certain institutions depending on their fiscal calendar), will likely have a major impact on a wide array of financial institutions.

What impact will that be? Sense on Cents’ friends at Santa Monica based 12th Street Capital have provided a fabulous review of FASB 166 and 167.  I link to 12th  Street’s review at the end of this commentary. In brief, FASB 166 and 167 will require hundreds of billions in assets to be moved from off-balance sheet vehicles onto the balance sheets of the financial institutions. As those assets, which are embedded in an array of securitization transactions, come on balance sheet, the banks and non-banks alike will have to raise more capital to support the growth in their balance sheets. Best guesstimate is that the institutions will need to raise capital in the tens of billions.

Are the financial institutions taking this rule change sitting down? No, but the FASB’s comment period is over and the implementation of FASB 166 and 167 is upon us as mentioned previously.

Is this accounting rule the reason why certain institutions are hoarding cash? Likely. That said, rest assured the financial lobby is fighting to have the FASB forestall and actually fully reconsider the implementation of 166 and 167.

One may ask why FASB feels the need to implement these accounting rules. Well, the spirit of the off-balance sheet activities has clearly been violated during the economic crisis of the last two years. While Washington and Wall Street can play charades on a number of fronts, ultimately some organizations care to have some truth, transparency, and integrity in financial reports. FASB 166 and 167 look to achieve just that.

I thank 12th Street Capital for providing a clear and concise review of these changes. Please access the thoughts of the sharpest minds on Wall Street, even though they’re based in Santa Monica, and merely click on the image below for the entire three page report.

To get all of my work and ensure you do not miss out on reports like this, please subscribe via e-mail, an RSS feed,  follow me on Twitter, or become a fan on Facebook.

Thanks for your support . . . now let’s dive into this fabulous research piece from our friends at 12th Street Capital.


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