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Earlier in the year, U.S. lawmakers and financial companies pressured the Financial Accounting Standards Board (FASB) into changing its rules to help out the banks. "Changes to fair-value, or mark-to-market accounting ... allow companies to use 'significant' judgment in gauging prices of some investments on their books, including mortgage-backed securities," wrote Bloomberg.
"Significant judgment" really meant "whatever the hell the banks wanted to do." And these are the same banks whose "judgment" led them to buy toxic assets in the first place and took the world to the brink of financial collapse.
According to analysts, under the amended rules, banks such as Citigroup (C) could cut their reported losses by an estimated 50% to 70% -- on paper, that is. How's that?
Well, if a bank says it cannot sell a security because the market is illiquid, the bank can keep it on its balance sheet at a value the bank decides it is worth. Not only are banks picking their own price, they are determining the definition of illiquid.
I get that the market is illiquid, but that does not mean their assets are not still there, or that they won't strangle the banks over time. It just means the banks have been able to produce legal-but-false earnings quarter after quarter ... but they can't do this forever.
Lesson for investors in 2010: Expect to see more writedowns from big banks than currently forecast, which will impact their earnings.
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Reader Comments (Page 1 of 1)
12-26-2009 @ 12:33PM
JCH said...
I just laugh my butt off at this. What is the value of an asset when there is no market for the asset because of panic in the market? Obviously, to abject idiots anyway, it's the very low price to which one would have to drop the asset to get somebody, anybody, to buy it. So, based up these morons' inability to think their way out of a paper bag, we are supposed to write off gigantic losses, throw the entire banking sector into insolvency, lose tens of millions more jobs, and cause enormous social unrest - perhaps for a decade or more?
Sorry, there are some people who are simply too stupid to have a seat at the leadership table.
FASB did the right thing. That some of them voted not to is deeply deeply disturbing.