In my opinion, the relaxation of the FASB’s (Federal Accouting Standards Board) mark-to-market rule was nothing more than a vehicle to allow banks to “cook their books.” The “cooking” of the books put the burner on a low simmer in order to allow the banks sufficient time to generate earnings. Those new earnings can and will be used to offset the currently embedded losses on the toxic assets still residing in the banking industry.
The FASB did not relax their accounting rule without enormous pressure applied by both the Wall Street and Washington chefs. The Wall Street Journal reports, Congress Helped Banks Defang Key Rule:
Not long after the bottom fell out of the market for mortgage securities last fall, a group of financial firms took aim at an accounting rule that forced them to report billions of dollars of losses on those assets.
Marshalling a multimillion-dollar lobbying campaign, these firms persuaded key members of Congress to pressure the accounting industry to change the rule in April. The payoff is likely to be fatter bottom lines in the second quarter.
I have numerous questions and comments on this topic, including:
1. If this accounting rule was so insidious, why was “mark-to- market” accounting ever enacted in the first place?
Sense on Cents: As with any accounting rule, the “mark-to-market” was implemented to create transparency.
2. Are the toxic assets still on the bank books?
Sense on Cents: Most definitely. They are merely being masked via this relaxation.
3. Banks maintain the toxic assets don’t actively trade and, when they do, they trade at levels not reflective of their true values.
Sense on Cents: These assets have traded everyday and at levels assuming a heightened level of future defaults on the underlying mortgages. If the banks believe the market levels are not reflective of true value, then why haven’t they and global investors raised the funds to purchase these massively undervalued securities? Investors trust the market assumption of future defaults.
The WSJ reports:
Earlier this year, financial-services organizations put their lobbyists on the case. Thirty-one financial firms and trade groups formed a coalition and spent $27.6 million in the first quarter lobbying Washington about the rule and other issues, according to a Wall Street Journal analysis of public filings. They also directed campaign contributions totaling $286,000 to legislators on a key committee, many of whom pushed for the rule change, the filings indicate.
4. Wall Street paid approximately $28 million in contributions and lobbying to effect this accounting change. The banks made these payments while in receipt of billions of dollars of TARP funds (taxpayer/ government assistance). Did Wall Street effectively utilize taxpayer funds in order to “pay” Washington so the banks could continue “to play” their game?
Sense on Cents: In my opinion, most definitely!!
5. How long had the “mark-to-market” been in effect prior to its relaxation?
Sense on Cents: Decades. It worked just fine.
6. Why didn’t banks lobby in the 2000-2006 era that assets were being overvalued via this accounting standard?
Sense on Cents: Bank executives were being “paid” from those inflated valuations.
7. Given that the banks now utilize internal pricing models to value the toxic securities, are those models and their embedded assumptions made public so investors can have some degree of transparency?
Sense on Cents: NO!! Why would the banks want the “cooking” exposed?
In summary, this version of “pay to play” will be seen as a watershed event in the Brave New World of the Uncle Sam economy. Why will future economic growth underperform? The banking industry will be forced to continue to set aside reserves against the embedded toxic assets. In so doing, the banks will have less credit to extend to consumers and business.