FASB Easing Guidelines On Mark-To-Market Accounting: Making The Curtain Thicker

The market appeared to love that the Financial Accounting Standards Board (FASB) would ease its guidelines on “mark-to-market” accounting. While we do think the effect has the potential to benefit financial institutions over the interim, the “hows” and “whys” of the change cheapens our entire system of accounting standards. Moreover, the effectiveness of FASB and other independent bodies to remain independent from political strong arming sets a bad precedence.

Markets do not function as smoothly during a financial crisis. As such, the benefits for mark-to-market accounting that the financial institutions received during good economic times have now reversed, forcing them to take big losses, albeit we suspect temporarily.

The new mark-to-market guidelines were designed to allow the “toxic assets” to be “fairly valued” to reflect current market conditions, thereby creating an “orderly” sale, rather than a forced or “distressed” sale. This should make it easier for companies to avoid having to take impairment charges on their investments. However, the determination to what would be the “fair value” will be left to the financial institutions’ best judgments.

In addition, this easing of guidelines creates a conflict with the Treasury’s plan for using the Public Private Investment Fund (PPIF) removing “Toxic Assets” from financial institution balance sheets. Under the easing, financial institutions would have an incentive to keep these assets on their books, rather than selling them. However, we suspect this could still result in “Zombie” institutions that will wait for these asset/securities to roll over their books, rather than taking a loss and getting on with the business of making loans.

As we stated last week, both Bank of America and Citigroup were aggressively buying these types of assets, bidding up prices. This leaves us to question if these companies had any foreknowledge of what FASB was going to present to the House Subcommittee, which stated (we paraphrase) - If you don’t come back quickly with the proposal we want, we will legislate FASB to do it.

The easing to guideline is effective from 2Q09 forward. We think that the rule change is an attempt to financially engineer results for institutions such as, but not limited to, Bank of America (BAC), Citigroup (C), Wells Fargo (WFC) and U.S. Bancorp (USB) in the short-term. This will enable them to hide the potential losses on their toxic securities - potentially skewing the “Stress Testing” that is currently going on in order to hide the potential for insolvency for some of the largest institutions deemed “too big to fail.”

It does not matter if you are for or against mark-to-market accounting. What should be infuriating to investors is that changing the accounting rules to allow the “fair and reasonable” valuation to be determined to the individual company’s internal people is ludicrous. It first removes any application of a “reasonable man” theory, and reminds us of what occurred in the aftermath of the French Revolution.

It should be a wake-up call if China basically chastises you for your accounting practices.

However, this will make the accurate valuations of companies’ assets very difficult, and in the long term it may drive away investors due to doubts about the accuracies of their financial statements.

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Comment by cindy peret

2009-04-06 04:55:53

eppphhhh…. hi, investors do not care abt fasb accounting guideline, we don’t even know about it. As long sa the parade is still on, and the cheerleaders are still dancing, we, professional fund mgrs, will just be jumping into the party

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