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Bonds Are a 'Safe' Investment: A Big Lie Gets Even BiggerIn the accounting business, helping clients improve earnings is not that hard, if you can change the rules. Banks would like the boring green eye-shades to alter how they value assets on bank balance sheets, a pretty nifty way to cut losses without doing anything meaningful to balance sheets.
According to Reuters, "Fair value accounting, which requires assets to be valued at market prices, has been blamed for billions of dollars in write-downs by some U.S. banks and policymakers."
Yes, but wouldn't all their investors like to see how badly banks were managed? How big the gambles were on toilet paper assets like mortgage-backed securities?
While it is fine to sweep the dirt under the rug, the rules are the rules and have been the rules for some time. Changing them now would cause a dislocation in reporting, For 2008, losses may be accounted for under one set of criteria. Next year, that may change. How do shareholders see the actual difference in earnings from one year to the next if the way that assets are valued is changed?
It is always nice to re-write the rule book. Why shouldn't a basketball player who is active now be able to score 100,000 points because he gets credit for a point every time he blows his nose? Just a year or so ago, he actually had to put the ball into the hoop.
Douglas A. McIntyre is an editor at 247wallst.com.
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Reader Comments (Page 1 of 1)
10-30-2008 @ 1:40PM
ChainedLightning said...
To a degree, yes, reporting fair market value is important. But it doesn't make any sense for many items.
Say I have a mortgage, and I make good money and I pay it every month. But now the value of my house has dropped, and suddenly I'm under the value of my mortgage. Theoretically the value of the mortgage has dropped because the collateral has. But *I am still paying my mortgage*. So the bank's actual value as far as the mortgage is concerned hasn't changed.
The auto companies value in their leased vehicles (and the massive losses they had to report when trucks and SUVs fell in value) is the same deal. People still making their payment, but they have to report a loss because the value of the item has changed, even if the contract that controls the money they make from it has not.