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View Full Version : New Rule Would Allow Banks To Choose Values Of Their Assets


Don Tiberone[_2_]
March 28th 09, 07:14 PM
Can I also "choose" the value of my investments? Now when your bank is
losing billions, they can just lie and say they are making money.

http://www.huffingtonpost.com/2009/03/26/new-rule-would-allow-bank_n_179489.html

The Financial Accounting Standards Board quietly buckled to banking-
industry pressure last week and proposed new accounting practices that
would allow banks to value assets at a higher price than they could
currently be sold for.

Banks have long demanded the "mark-to-market" accounting rule change,
arguing that it's unfair to require them to mark toxic assets down to
current market prices because the very market for those assets is
frozen.

The move marks a shift for Robert Herz, head of the FASB, who recently
told a panel of lawmakers that the harshest critics of mark-to-market
accounting practices have been the very same banks that have gone
under when regulators would not let them adjust their accounting. Herz
and other regulators have been under intense congressional pressure to
reform the rules.

"I will tell you that I get calls and visits from some of those
institutions that are now in government hands, about two weeks before
they get taken over, trying to get the accounting changed," he said.
"Clearly some of the most vocal opponents of fair value and mark-to-
market have been some of those institutions that ultimately failed and
have had to have billions of taxpayer dollars put into them."

House Speaker Nancy Pelosi (D-Calif.) said that she's been consulting
with former Federal Reserve Chairman Paul Volcker regarding the
reform.

"I've talked to Mr. Volcker about this, who knows a great deal about
it. And I think caution is important in it, but I think attention is
necessary," said Pelosi in a brief interview with the Huffington Post.

She said that she's following the issue closely. "I think it has to be
done with care. But we have to pay some attention to it because the
current system is not working," she said. "It's the whole thing: If
you mark it too low, what's the price?"

Volcker chaired a financial reform study that reported its findings in
January (PDF). It came down on the side of reforming mark-to-market
rules. "Fair value accounting principles and standards should be
reevaluated with a view to developing more realistic guidelines for
dealing with less liquid instruments and distressed markets," it
recommends. "The tension between the business purpose served by
regulated financial institutions that intermediate credit and
liquidity risk and the interests of investors and creditors should be
resolved by development of principles-based standards that better
reflect the business models of these institutions."

Rep. Alan Grayson (D-Fl.), who quizzed Herz on the accounting rule,
said that the demand to change the rules is "representative of exactly
the kind of thing that's put us in this position in general...We have
people who break every rule in the book and then they think that the
answer to their problems is to break more rules. It's given us some
real insight into the human nature and the pathology of the people who
have created these problems for America."

If banks are allowed to determine the value of their assets without
regard to current prices, investors have less trust and confidence in
the integrity of their books and their assets, which could further
freeze markets and further drive down prices.

The proposed FASB rule, according to a release from the agency,
"provides a framework for measuring fair value and a definition of
fair value that contemplates an orderly transaction between market
participants, not a forced or distressed sale."

It goes on: "In the current economic crisis, many constituents have
requested additional authoritative guidance to assist them in
determining whether a market is active or inactive, and whether a
transaction is distressed. Proposed FSP FAS 157-e would provide this
application guidance."

In other words, if a bank asserts that the market for a certain asset
is "inactive," then it need not write the value of it down to market
prices. Critics such as Grayson insist this change would allow banks
to continue a fiction of viability when in fact they may be insolvent.

"I think the real reason this has come up now is because a lot of the
institutions are genuinely insolvent and don't want to admit it,"
Grayson said.

Treasury Secretary Timothy, testifying before Congress on Tuesday,
expressed some support for the rule change, calling it a "constructive
set of changes" that struck a balance "between preserving confidence
in the quality of public disclosure, which is very important to
getting through this, [and addressing] some of the complications of
applying those standards in a market like we're experiencing today."

RayLopez99
March 29th 09, 02:14 PM
On Mar 28, 3:14*pm, Don Tiberone > wrote:
> Treasury Secretary Timothy, testifying before Congress on Tuesday,
> expressed some support for the rule change, calling it a "constructive
> set of changes" that struck a balance "between preserving confidence
> in the quality of public disclosure, which is very important to
> getting through this, [and addressing] some of the complications of
> applying those standards in a market like we're experiencing today."

It's papering over cracks but might be a good idea. Mark-to-market
exaggerates profits during upswings and non-mark-to-mark preserves
profits during downswings. And it's ironic Huffington Post now wants
to go back--I'm sure they would have been against m-t-m when it was
proposed, as the financial profits accelerator which it is.

RL