The FASB Rally: More Dishonest Breathing Room For Banks

The Dow finally topped 8,000 yesterday morning for the first time since February. Good news for investors, especially owners of bank shares worried over whether hobbled institutions would survive under the weight of all those bad mortgage assets sitting on their books.

Bank shares are up because rule-setters just made it easier for banks to obscure the value of their toxic assets. The Financial Accounting Standards Board revised its rules to allow companies more leeway in determining "fair value" for assets on their books and reduced the threat of taking big charges against earnings on investment losses. That kicks in this quarter and can be applied to the first quarter as well.

Banks will be allowed to largely define their own "orderly" strategy for winding up those bad assets, which likely means fewer writedowns on losses like those required under current mark-to-market standards. Ultimately, it equals breathing room for the big banks, higher share prices in the near-term, and not much else. Yesterday's rally aside, bank solvency is still a question (OK, THE question).

Now however, that question is actually more obscure thanks to looser accounting practices, and that's why this latest fix that should inspire some public anger (and uncertainty among investors). Banks, which got into all this trouble by essentially making up values for huge piles of mortgage-related assets, are being bailed out by easier rules letting them set their own higher values on those very same assets now that they've been deemed (by the banks) to be worth too little in the present market.

In other words, banks are still able to tell the market what they're worth. That doesn't make their balance sheets any more believable.

Comments

[Audio Tactics:]

Have any analysts increased their S&P500 earnings estimates for 2009 as a result of this FASB change?

Apr 03 04:15 AM

[Massimo GIA...:]

If you cannot fix your accounts just fudge them...

Apr 03 04:50 AM

[yay:]

you have to take into account that these writedowns at first occured because there was no market, and there was no market because nobody wanted the ACCOUNTING risks these instruments brought with them, not neccessarily DEFAULT risks, if you discount the cashflow these papers will bring if ypu hold them till maturity you should still get a fairly high value, read mauldins report on this, frontline report or sth from 2 weeks ago...

Apr 03 04:52 AM

[gtmcduffy@g...:]

bloggingstocker.blogsp...

Apr 03 06:31 AM

[1worldcurrency:]

Congress could easily reset the banking system in little time:
Modernize Treasury direct.
Any term, any denomination (already available). Teaser rate to get started.
Reduce temporary FDIC guarantee back to 100,000. Bye Bye banks.

Apr 03 06:43 AM

[doubleguns:]

Audio tactics: You are spot on. There can be no P with an E.

Apr 03 06:47 AM

[citetez:]

The "dishonesty" was really in forcing banks to book paper losses before they occurred (and when they might never occur) on illiquid assets based on a temporary market crisis. This killed the banks and perpetuated the crisis. Lifting Mark to Market will be hailed as the end of this crisi period. Not all will be rosy from here, but this allows the markets and the marketplace to heal.

Apr 03 07:15 AM

[doubleguns:]

Oops it should be with OUT an E. Must be lack of coffee.

Apr 03 07:40 AM

[Michael L:]

Watch when banks start buying assets from each other at "market prices". You buy mine and I'll buy yours. The ol' boy network or hucksters and frauds has new life. FASB? Who runs that and with what oversight? Wasn't mark to market what kept Greenspans internet bubble afloat for so long? When it comes to the American puplic the government's motto seems to be "if you can't beat 'en, cheat 'em."

Apr 03 07:43 AM

[dcb:]

this is not correct. if you forclose you have those costs, you have resale costs, you have the write down on what the house now sells for, and you have the new cash flow at lower interest rates and lower sale value.


On Apr 03 04:52 AM yay wrote:

> you have to take into account that these writedowns at first occured
> because there was no market, and there was no market because nobody
> wanted the ACCOUNTING risks these instruments brought with them,
> not neccessarily DEFAULT risks, if you discount the cashflow these
> papers will bring if ypu hold them till maturity you should still
> get a fairly high value, read mauldins report on this, frontline
> report or sth from 2 weeks ago...

Apr 03 08:39 AM

[dcb:]

I think all those who support the removing of mark to market should be forced to purchase these assets at the price the banks state they are worth. why don't you folks put your money where your mouth is since you clearly believe they are undervalued. I ain't going to touch them.

Buy the securities or shut up.

Apr 03 08:42 AM

[monday1929:]

Keep believing, it is profitable for me. mauldin is good, but vastly underestimated the extent of this coming Depression. He also just published the Criminal PIMCO's take on things, a disappointment for me.


On Apr 03 04:52 AM yay wrote:

> you have to take into account that these writedowns at first occured
> because there was no market, and there was no market because nobody
> wanted the ACCOUNTING risks these instruments brought with them,
> not neccessarily DEFAULT risks, if you discount the cashflow these
> papers will bring if ypu hold them till maturity you should still
> get a fairly high value, read mauldins report on this, frontline
> report or sth from 2 weeks ago...

Apr 03 10:27 AM

[monday1929:]

No, the internet bubble involved other crimes. All your other points are good, though.


On Apr 03 07:43 AM Michael L wrote:

> Watch when banks start buying assets from each other at "market prices".
> You buy mine and I'll buy yours. The ol' boy network or hucksters
> and frauds has new life. FASB? Who runs that and with what oversight?
> Wasn't mark to market what kept Greenspans internet bubble afloat
> for so long? When it comes to the American puplic the government's
> motto seems to be "if you can't beat 'en, cheat 'em."

Apr 03 10:31 AM

[monday1929:]

And when does the tooth fairy show up at our doors? This "fire sale"
has been going on over two years now, when will you admit you are wrong? Prices are prices, as the Great Free Market Pirates loved to Tout in their heyday.


On Apr 03 07:15 AM citetez wrote:

> The "dishonesty" was really in forcing banks to book paper losses
> before they occurred (and when they might never occur) on illiquid
> assets based on a temporary market crisis. This killed the banks
> and perpetuated the crisis. Lifting Mark to Market will be hailed
> as the end of this crisi period. Not all will be rosy from here,
> but this allows the markets and the marketplace to heal.

Apr 03 10:34 AM

[infp:]

There is still plenty of money sitting on the sidelines waiting to invest. If these legacy/toxic assets are really such a long term bargain wouldn't someone have already bought them? I'm still sitting on some undervalued dot.com stocks from 2002 that I think are wonderful long term values. Mind if I value them myself and then sell them to you?

Apr 03 11:55 AM

[PainfullyAware:]

Being that I deal with the Distressed Real Estate and have first hand knowledge of the "Because I Say So Valuation" that has brought this crisis on; I will state that - Yes, the banks will be able to pretend they are solvent and - No, They will still not be able to sell these "Toxic Assets". The Fraud That Has Been Committed Through The "Shell Game" And Skimming Of Fees Is Staggering.

Band Aids Do Not Close Gaping Wounds.

Lets All Pretend Until The End. (Maybe it will all just work out and go away)

Apr 03 01:54 PM

[Slim Shady:]

DCB - all those who support the current market to fiction rules ought to follow those same rules with your own mortgage. If you buy a house for $500k, take out a $400k mortgage, and your reckless neighbor with the same $500k house defaults and the bank sells it at a fire sale price of $250, you would be required to come up with another $200k to keep your equity at 20%, even if 1) you were current on your payments and, 2) you had no intention of selling at that same fire sale price. Even if your neighbor didn't default, you would have to go out on a quarterly basis and find a bid for your house - if the highest bid was $250k, same result, you'd need to come up with $200k additional equity.

I seriously doubt you would be willing to operate with those rules which is exactly what the banks have to deal with. If not, than you need to shut up.


On Apr 03 08:42 AM dcb wrote:

> I think all those who support the removing of mark to market should
> be forced to purchase these assets at the price the banks state they
> are worth. why don't you folks put your money where your mouth is
> since you clearly believe they are undervalued. I ain't going to
> touch them.
>
> Buy the securities or shut up.

Apr 03 06:37 PM

[Chrisvnerd:]

I consider myself a layman on this stuff, so let me know if I have this right?

Anti Market Pricing point-of-view: These assets aren't necessarily worthless, just hard-to-move, which brings down the immediate value of these assets. Market pricing will distort bank balance sheets to show them as having less assets and makes them insolvent?

Apr 03 07:48 PM