It appears that the Financial Accounting Standards Board (FASB) – the “independent” rule-making body of the accounting profession – and the US Government are in almost perfect sync. One week the FASB relaxes FAS 157 – the mark-to-market standards applying to financial asset portfolios – while the next brings the Treasury Department’s release of bank stress test results. The Treasury, without question, has tremendous latitude in how it reports the results of the stress tests, and if it chooses it might well incorporate the expected benefits of the “new” FAS 157 on bank capital balances. This would have the beneficial public relations impact of showing banks as being much healthier than the former accounting regime would indicate, the regime that forces banks to deal with the reality of where their assets would clear the market. And while naysayers would have you believe that marking-to-market assets which are intended to be held until maturity is harsh, I’d counter with this simple question: does the bank have the term capital, and, therefore, the ability, to fund these assets until maturity? If the answer is no, which is invariably the case given the massive size of bank illiquid asset portfolios relative to term capital, then marking-to-market is the prudent way to reflect its true financial position. The US Government is conveniently staying silent on this part of the debate. But what else should we expect? The business at hand is that of manufacturing outcomes, regardless of their basis in reality.
Merely the latest formula to describe the US Government’s approach to spinning the financial crisis:
Relaxing FAS 157 + Release of Treasury stress test results = A Positive Manufactured Outcome
The stock market will initially cheer the positive results, following the US Government’s lead. But once reality sets in, the reality that deals with market values, financing terms and solvency, the pretty picture that has been painted won’t look so good. But hey, things are OK for now, right? For now.