Ken Lewis on Bank Accounting: Sensible Talk from a Surprising Source

Dec. 5.08 | About: Bank of (BAC)

Bank of America (NYSE:BAC) CEO Ken Lewis and I have had our share of disagreements over the years. Still, Lewis’s comments on bank accounting, made at the Charlotte Chamber of Commerce’s Economic Outlook Conference yesterday, couldn’t be more on-point.

As reported in Thursday morning’s Charlotte Observer,

Lewis said two financial policies have contributed to the banking crisis. Market-to-market accounting rules require banks to value their assets based on a price they could immediately fetch, rather than their long-term value. That’s resulted in absurd short-term valuations, Lewis said.

Another problem is capital provisioning policies. ‘This idea of building reserves in the bad times and reducing reserves in the good times…. I don’t know how big a squirrel’s brain is, but a squirrel knows better than that,’ he said.”

Exactly right! Both mark-to-market accounting and the FASB’s ridiculous, upside-down rules on loss provisioning have served, to no good purpose, to unnecessarily depress bank earnings in 2008 and will continue to hold back bank earnings in 2009. Then those same rules will help drive an (also semi-artificial) earnings explosion later in 2009, 2010, and 2011.

If only Lewis had also mentioned that the behavior of the rating agencies during the credit crisis has been disgraceful and irresponsible and that the agencies should be stripped of their status as Nationally Recognized Statistical Rating Organizations, he’d have hit my trifecta, and I would have offered to buy him a beer! As it is, Lewis made a lot of sense yesterday, and raised some issues which more banking CEOs should be talking about, a lot more often.