Wall Street celebrates accounting rule changes designed to hide losses

[Hannah Bell]

By Andre Damon
3 April 2009

The Financial Accounting Standards Board (FASB) voted Thursday to let US banks set their own prices for assets in earnings reports, regardless of current prices.

The move, which was heavily lobbied for by Wall Street, is expected to increase bank earnings by 20 percent in the next quarter. Richard Dietrich, an accounting professor at Ohio State University, told Bloomberg News that the decision would allow Citigroup to reduce its reported losses by 50 to 70 percent.

The announcement sparked a rally on the stock market, led by financial companies. Citigroup stock rose 8.6 percent, Bank of America soared 9.6 percent and Wells Fargo rose 10.5 percent. The rally subsided later in the day, but financial stocks retained significant gains and the Dow Jones Industrial Average closed with a gain of more than 216 points.

Banks are currently required to calculate their earnings, under so-called "mark to market" accounting rules, according to the current market value of the securities they hold, but the new measure would allow them to value assets using their own internal models where the assets would otherwise be sold into a "distressed" market. Banks have argued that markets are not pricing financial assets fairly, causing credit to dry up and exacerbating the crisis...

Now, with the blessing of the administration and the Democratic-controlled Congress, the government is effectively sanctioning accounting fraud. This underscores that the financial elite, working through its political instrument, the Obama administration, is creating the conditions for a vast expansion of the socially destructive forms of financial parasitism that led the US and world economy into the deepest crisis since the 1930s...."

http://www.wsws.org/articles/2009/apr2009/fasb-a03.shtml


So the deal is, BANKS can set any value they like on their supposed "assets," but other companies' assets (like, e.g., autocorps) will be valued by the "market"?

Seems like that gives banks a big advantage over companies which actually produce something, which can be used to forces productive companies into failure, buy them cheap, take them apart & resell the new asset packages at a premium.

Not to mention further depress wages...

[w4rma]

1. Every day I see worse and worse moves by Obama's financial team. (nt)

[PSPS]

2. Me too. It's like Obama thinks Enron had the right idea.

[Raineyb]

9. In Obama's defense, the FASB should have told congress to piss off

As it was congress that was pushing for the rule change.

That aside, this is not a good idea and will only lead to more rip offs. As if they haven't robbed us enough already.

Regards

[TomClash]

3. This is the old rule restored

It's called "mark to make believe."

[democracy1st]

4. K & R

[Fumesucker]

5. Now *that* is change we can believe in...

Pull the other finger.

[Dover]

6. Fraud used to be a crime. So are we ALL free to re-value our assets and portfolios?

FASB Rule Changes: Weighing Who Gains
Analysts cite Citigroup, JPMorgan Chase, Zions, and M&T

American Banker | Friday, April 3, 2009

By Heather Landy

The more exotic the securities, the better?

New accounting rules announced Thursday may benefit Citigroup Inc., JPMorgan Chase & Co., Bank of America Corp., Wells Fargo & Co., Bank of New York Mellon Corp. and State Street Corp., analysts said.

Smaller players, such as Zions Bancorp. in Salt Lake City, M&T Bank Corp. in Buffalo and Popular Inc. in Puerto Rico, will also be on analysts' radar screens.

The new rules "should have a very positive effect on their capital balances, that's for sure," said Robert Willens, head of the tax and accounting advisory firm Robert Willens LLC in New York.

Companies will "get to write up the carrying amount of their debt securities and in some cases equity securities, and that increase in value is credited to 'other comprehensive income' and eventually to shareholder equity."

What the banks all have in common: relatively high exposures to exotic, difficult-to-value assets that could be valued higher under the new rules announced by the Financial Accounting Standards Board.

By adjusting the rules on mark-to-market accounting and on accounting for other-than-temporary impairment charges, the FASB has given companies more flexibility to value assets when prices may not be accurately reflected in distressed markets.

Analysts said that taken together, the new rules are nearly certain to make banks appear healthier, to the extent banks actually act on them.

...snip...

"At the end of the day, the investment community is looking at all this with big grains of salt," said Anthony Davis, an analyst at Stifel, Nicolaus & Co.

The Investors' Working Group, a panel of high-profile financial experts including former Securities and Exchange Commission Chairmen William H. Donaldson and Arthur Levitt Jr., said that the new rules reduce transparency and that the rushed process will lead to "an increase in capital costs, erosion of investor confidence and ultimately a disruption of markets."

FASB Chairman Robert H. Herz defended the board's compressed time frame for changing the rules, saying a shortened public comment period and other expedited procedures never compromised the board in the performance of its duties.

Cont'd

http://www.americanbanker.com/printthis.html?id=200904020Y8ZN0DN

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[KharmaTrain]

7. So What Is The Market Right Now???

Try to get a current price on your house? Good luck. Is it worth $300k, 200k, 100k? Good chance it's not even worth that much considering how tight the market is and the price those looking are willing to pay. The same could be applied to many of the assets, other than money, held by these banks. With the marketplace shattered, getting an accurate value on their assets isn't a simple process. While I've been critical of the "creative bookkeeping" by Wall Street, the fluidity of the market could create a lot of problems if banks either under-report their assets (that makes them appear to be insolvent) or over-reported that would make it look like they have more on the books than they really do.

Yes...our economy is in a major meltdown. The credit crunch has shut down many of the markets used to gauge value.

[underpants]

8. 2014 International accounting standards will be the rule

already agreed on. International standards actually usually increase balance sheets. FASB will still have a say but they will not be THE only standard anymore.

[unblock]

10. it's not a great long-term solution, but it does have some merit short-term

i agree that it's subject to abuse, but when the markets are as screwed up as they are now, mark-to-market makes little sense.


imagine that your neighbor loses his job, goes bankrupt, and has his house sold at foreclosure at a fire-sale price.
the banks then decide that YOUR house must also be worth considerably less, and even though you still have your job, have never had any problems making your mortage payments, and have no intention of moving in the next couple of decades, they nevertheless insist that you pay down half your mortgage or else they'll put YOU into bankruptcy. all this so your mortgage can be brought in line with "market" prices.

as i said, mark-to-make-believe is hardly ideal, but mark-to-fackacta-market doesn't work well either.

[MadHound]

11. Boy, the financial sector knew what they were doing when they invested 14 million dollar in Obama

They're getting a fine return on all that money. Hundreds of billions in bailouts, few strings attached, many of their own actually in the administration itself, now this fine little prelude to another ripoff. All for an investment a bit over 14 million dollars.

Now this is how you buy a seat at the table. A real shame that we the people can't buy the same sort of representation.

[flamin lib]

12. This rules change is not necessarily bad and, if oversight is enforced,

it can be very good. Yes there are regulations and oversight in place as we type.

Take the toxic assets of bundled mortgages:

100 mortgages are bundled, 30 of them fail. Because investors are frightened nobody will buy the bundle, so the "market value" is $0.00. However, 70 of the mortgages are in good standing and are generating income. Now instead of $1 million in income there's only $700,000. The value of the asset isn't in the sales price, but the income stream it generates. Even if the asset only breaks even, it has some value because the market will eventually correct.

I believe this is the gist of the rules change.

This is what got AIG in trouble. They didn't insure the assets, they insured the cash flow so if the income decreased AIG had to replace it with other income. It was a swap of one income stream for another, hence a "credit default swap". What AIG didn't count on was the magnitude of the income loss coupled with the bank's inability to value the assets.

Another way to value an asset is to assign a value to the physical property. 100 mortgages @ $100k each purchase price, 30% fail and are de-valued by 15-20%. 70% of the asset remains unchanged in value and the remainder only loses a fifth of original purchase price. Surely those properties have some value, right?

One last analogy; You put your house on the market at $100k. It doesn't sell. Does that mean your house is totally worthless? No, it means that you aren't willing to drop your price to find a willing buyer. The mark to market rule effectively makes it impossible for the banks to find that real market value.

Grossly oversimplified of course . . .

[acmavm]

13. Nice. Next let's put axe murderers and child molesters on

parole boards.