New Accounting Rules

Posted Jun 5th 2009 3:10PM by Connie Madon
Filed under: Earnings reports, Market matters, Financial Crisis

With a sleight of hand, the Financial Accounting Standards Board gave banks a way of hiding their losses, at least for the time being. What was this sleight of hand? With powerful lobbying by 16 industry association groups who call themselves the Fair Value Coalition, a proposal to use "mark to market" to price the value of distressed assets was killed. Congress, it seems, bowed to the lobbyists and complained that the existing "mark to market" standards worsened the financial crisis. So what is the new rule? Who knows? Its hard to figure out exactly what standard banks are using to price distressed assets.

Meanwhile banks have been showing nice profits over the past month. And we've seen glowing comments from bank executives telling us how their profit picture has improved.The problem is that they don't reflect the true financial condition of the banks. Martin Weiss of Weiss Research Inc. said: "the big banks' profit were actually bogus." Weiss goes on to say: "Citigroup's $1.6 billion in first quarter profit would vanish if accounting were more stringent." At Citigroup (NYSE: C), which received $346 billion in fresh capital and asset guarantees from the government, about 25% of its quarterly net income came from debt securities rule changes. At Wells Fargo & Co. (NYSE: WFC), the new standards boosted its capital by $2.8 billion dollars and augmented its income by $334 million. This won't last because Wells Fargo faces large loan losses from increasing home mortgage defaults.

According to Tavakoli, 40% of subprime mortgages are already 30 days or more overdue and defaults may go as high as 55%. So when will the banks' next time bomb explode? It could come in 2010 when regulators force banks to put distressed assets "on the books." So far banks are keeping billions and even trillions of dollars "off the books." Who knows what kind of losses are hidden among them. As we speak the lobbyists are marshaling their forces along with the Fair Value Coalition and are descending upon Congress to kill this new rule, just like they did "mark to market."

I don't know what's wrong with regulators or Congress that they don't see that unless banks put all of their "off the books" securities "on the books" that we will have another financial crisis. What is the greatest mystery of this century is why banks are not forced to do business like everyone else. They are the backbone of our economy. Sooner or later they will have to "bite the bullet" and let the chips fall where they may.

Do you believe that banks should put all of their "off the books" assets "on the books?"

Bilibala comments
I think there is a trade off between reliable and relevant.
Cost is more reliable while market value is more relevant & subjected to lots of unreliable, subjective & short sighted market movement.

By thinking using mark-to-market will provide the most reliable and relevant results, in itself, is stupid!! Only those financial analysts who don't know accounting will say that.
Unrealized gain / loss is not a loss, at least, it is not a realized loss. Current accounting rule and SOX requipment should be able to keep the corporation from hiding their loss.

Today, USA government change the rule to mark-to-model under circumstance is good. Not just because it will help the financial institution a relief to stop marking the assets further down. It also bring a balance between reliable and relevant, provide a more balance & more conservative balance sheet to shareholders, investors and to senior management team. So that they can have better decision making for future.