MarketWatch reports that accounting standards now determined by mob rule.

(emphasis mine) [my comment]

Congress isn't helping
Commentary: Accounting standards now determined by mob rule
By MarketWatch
Last update: 12:33 p.m. EDT April 2, 2009

WASHINGTON (MarketWatch) -- The only thing worse than bankers making up accounting rules is members of Congress making them up.

Repeating its blunder from the 1994 battle over stock options, the staid Financial Accounting Standards Board has buckled to political pressure demanding that it change accounting rules. The FASB voted Thursday to ease the interpretation of rules requiring banks and other big institutions to value their assets on a reasonable basis.

The value of the banks' assets is a huge issue for the global economy right now, because banks are required to have a certain amount of cushion to back up their loans. No cushion, no new lending.

As home values sank and more mortgages went into default, much of the banks' capital cushion was revealed to be no more than hot air.

Easing the so-called mark-to-market rules is expected to boost bank earnings by 20% on average in the first quarter, analysts said. It also could make it less likely that banks will sell some of their assets at fire-sale prices to the public-private investment program, just established by Treasury Secretary Timothy Geithner.

The banks had a valid point in asking for some forbearance. Some of their assets were performing well each month, and surely are worth more than they can fetch on the open market today.

But by caving into pressure so quickly, the FASB has signaled that accounting standards are subject to the whims of the mob. That really means there are no standards at all, just interest groups.

Giving the banks more leeway in valuing their assets could boost earnings in the short run, but it inevitably will erode investors' faith that the banks' books reflect reality. If the banks want to attract new capital, they'll have to prove they can make money without having their pet legislator lean on the auditing board.

If the government thinks we need tougher regulations over financial firms -- and we surely do -- it will have to prove that it can recognize the difference between the public good and the interests of campaign donors.

MarketWatch reports that FASB approves more mark-to-market flexibility.

FASB approves more mark-to-market flexibility
Panel passes measure unanimously; measure could boost bank profit
By Ronald D. Orol, MarketWatch
Last update: 2:49 p.m. EDT April 2, 2009

WASHINGTON (MarketWatch) -- Responding to pressure applied by lawmakers on Capitol Hill, the Financial Accounting Standards Board on Thursday voted unanimously to give auditors more flexibility in valuing illiquid mortgage assets that may have long-term value.

The new guidance, which is expected to boost bank operating profits when they report first quarter results later this month, alters so called mark-to-market rules, which have required banks and other corporations to assign a value to an asset, such as mortgage securities, credit-card debt or student-loan investments, based on the current market price for either the security or a similar asset.

Banks have complained that they have viable [toxic] assets with strong cash flows that can't be sold because there is no market for them.

Seeking to resolve this situation, FASB's new guidance allows banks and their auditors to use "significant judgment" when valuing the illiquid assets such as mortgage securities.

For example, if companies have assets with strong cash flows that can be estimated [optimistically guessed], then those cash flows would be used to approximate market value in the illiquid market. This approach could be used when bank auditors determine there is a "significant decline of a market for new issuances," in other words if there was a primary market and now there is no market.

FASB Chairman Robert Herz said the agency reached out to analysts, accountants, hedge funds, mutual funds and rating agency officials before approving the new guidance. He said auditors will need to make a greater effort to judge whether something is distressed or not.

"The majority supported what we were doing," Herz said. "There no longer will be the presumption that these assets are being sold in a distressed sale."

The F ASB approval comes after an effective lobbying campaign on Capitol Hill by the American Bankers Association and other interest groups. Roughly 800 bankers gathered in Washington earlier this week, in part, to meet and press lawmakers to send a message to FASB that the accounting rules needed to change.

Legislative pressure by lawmakers on FASB pinnacled on March 12 at a congressional hearing focusing on mark to market accounting. Lawmakers pressed FASB's Herz, who testified before the committee, to produce new audit guidance within three weeks.

Other changes approved

Another provision that the FASB board approved would allow companies to put certain illiquid debt assets, such as mortgage securities, they would otherwise have been forced to write down into a category called "other comprehensive income." As a result, financial institutions' operating income is improved because they can record a lower amount of loss in their income statements.

These are illiquid securities that are "impaired," which means companies no longer believe they can collect all the amounts due.

The measure also requires expanded disclosure: Corporations must provide more details, on a quarterly basis, about the methodology they used to justify putting certain assets in the "other comprehensive income" category.

Impact of the new interpretation

The provision allows banks to make changes to their first-quarter 2009 results, which are expected to be released by mid-April. However, FASB members argued that it will be difficult for banks to make the adjustment during that period.

Ellen R. Marshall, partner at Manatt, Phelps & Phillips LLP in Orange County, Calif., said she expects the new guidance will make auditors more comfortable approving the methodologies used by banks to value their assets. She added that many banks are writing down the value of some assets, sometimes to as low as 50% of their original value [instead of their real value, which would be 0%], as part of their first quarter results.

The new guidance, said Marshall, would allow banks to adjust their valuations and take less of a write down on those assets for the first quarter. However, she added that making those changes and having them approved by external auditors will be hard to do in the next few weeks before first quarter results are due. "It wouldn't surprise me if some of the impact does not get reflected until the second quarter," Marshall said.

Columbia Business School Accounting Professor Robert Willens said new audit guidance, which gives banks the ability to use internal models and analysis to value their illiquid assets ["internal models and analysis to value their illiquid assets" = mart to myth], could hike their earnings on average by 20%. However, he added that large banks such as Citigroup Inc. (C) would get "the lions share" of the revaluation profits because they are stuck with a disproportionately large amount of the illiquid [worthless] mortgage and other securities.

However, Joshua Shapiro, chief economist for MFR Inc. in New York, said the new guidance decreases transparency and allows financial institutions to use fictional valuations for many toxic assets. "Shenanigans such as this do nothing to resolve the many problems facing the financial system [Agreed]," Shapiro said.

The retroactive issue

However, the battle over mark-to-market may not yet be over. Bankers are pressing lawmakers to urge FASB and its parent regulator, the SEC, to set up a procedure to retroactively recoup losses financial institutions have already taken on impaired illiquid assets. [The sheer audacity of these bankers...]

House Financial Services Committee Chairman Barney Frank, D-Mass., told the American Bankers Association on Tuesday that he will take their concerns about reversing retrospective losses to the SEC and Congress. "They [bankers] ought to be able to go back and say they took that loss on an asset that is being held to maturity and recoup that loss," Frank said.

However, Willens said it would be extremely unusual for FASB to allow banks to go back and restate their existing earnings. "FASB doesn't traditionally do that, but Frank's pressure could make it happen," he said.

The bankers also discussed plans to talk with lawmakers on Capitol Hill about their support for legislation introduced by Reps. Ed Perlmutter, D-Colo., and Frank Lucas, R-Ok., which would create a Federal Accounting Oversight Board made up of officials from FASB, the Federal Deposit Insurance Corp., Federal Reserve, Treasury Department and the Public Company Accounting Oversight.

Forbes reports that Congress is threatening FASB over mark-to-market rules for banks

To work our way out of the current morass, it will be necessary to relax the mark-to-market rules for banks on valuing the assets that need to be taken off of their balance sheets. Congress is threatening to pass a bill creating a new Federal Accounting Oversight Board if FASB does not provide a change in fair value application by early April. It would help if the banks can price assets that are generating income at their holding values, which is a lot higher than the price buyers in the open market would currently be willing to pay. In this way, the write-downs would not be so severe.

My reaction: The current financial crisis is in great part the result of a general lack of transparency. Now, thanks congressional pressure, FASB is set to increase that lack of transparency.

1) the Financial Accounting Standards Board has buckled to political pressure and voted Thursday to ease the interpretation of rules requiring banks and other big institutions to value their assets on a reasonable basis.

2) the new guidance decreases transparency and allows financial institutions to use fictional valuations for many toxic assets.

"Shenanigans such as this do nothing to resolve the many problems facing the financial system"

3) Easing the mark-to-market rules is expected to boost bank earnings by 20% in the first quarter (benefitting the worse banks, like Citigoup).

4) Giving the banks more leeway in valuing their assets could boost earnings in the short run, but it inevitably will erode investors' faith that the banks' books reflect reality.

5) The FASB approval is the result of an effective lobbying campaign on Capitol Hill by the American Bankers Association and other interest groups.

6) Congress threatened to pass a bill creating a new Federal Accounting Oversight Board if FASB does not provide a change in fair value application bankers wanted by early April.

7) Bankers are now pressing lawmakers to urge FASB and the SEC to set up a procedure to retroactively recoup losses already taken on toxic assets.

8) It would be extremely unusual for FASB to allow banks to go back and restate their existing earnings

"FASB doesn't traditionally do that, but Frank's pressure could make it happen,"


Conclusion: It is vitally important (for bankers) that mark-to-market rules be relax. If they aren't, bankers will be facing pathetic 2009 bonuses. However, if banks are allowed "to recoup losses already taken on toxic assets", everything will be OK, and bankers will get the fat bonuses they have gotten so used to.

Below is how I explained the situation about fair value accounting last month, in my entry "Banks set to "play make believe" with the valuation of their assets".

Basically, banks really want to pretend that they are solvent. They are arguing that if we let them "play make believe" with the value of their assets, everything will be OK.

1) The US Financial Accounting Standards Board was poised on Tuesday to publish two staff papers that would allow banks and other companies more freedom in how they value financial assets.

2) With FASB's new rule changes, toxic bank securities will be valued at the prices bankers wish they could sell them rather than the prices at which they could actually be sold.

3) Since the imaginary prices are a lot higher than the real prices, most of these assets will go up in value.

4) Banks will be able to use these imaginary prices as soon as next month.

Conclusion: Expect more banks like Citigroup to start posting profits as accounting rules are "tweaked". When these bank "profits" do start showing up, remember that they are as real as the Easter bunny.