Will the G20 crack down on the FASB?

By Felix Salmon
April 2, 2009

Floyd Norris has the expected yet still depressing news from the FASB: bowing to political pressure, it’s severely weakening the mark-to-market rules which apply to banks. The doublespeak from the ABA is particularly egregious:

Banks have long been required to value some assets at their current market value, but the rule has provided an exception allowing banks to disregard “distress” sales that do not accurately reflect real market values.

One rule adopted Thursday will make it easier for banks to conclude sales are distressed and can be ignored.

The American Bankers Association, which had pushed legislators to demand the board make changes, praised the decision. “Today’s decision should improve information for investors by providing more accurate estimates of market values,” the association’s president, Edward Yingling, said.

One particularly unhelpful effect of this rule will be to create even more of a disconnect between the income statement and the balance sheet:

For some other assets, banks must write them down to market values only if they conclude that the decline is “other than temporary.” The measure that drew dissents will allow banks to keep part of such declines off their income statements, although the decline would still show on the institutions’ balance sheets.

Essentially what this means is that retail investors wanting to do their homework before investing in banks are going to be put at a huge disadvantage to the institutional analysts who have the time to bone up on the finer details of what can be fudged, accounting-wise, and what can’t. And more generally, the amount of faith that the markets have in banks’ reported earnings will fall even further from its already-very-low level.

There are some pretty big names coming out in opposition to the new rule, including an organization called the Investors Working Group, which is led by former SEC chairs William Donaldson and Arthur Levitt. With any luck, the root-and-branch regulatory reform being promised by Tim Geithner will include an overhaul of the FASB, and ideally do away with US GAAP altogether, replacing it with International Financial Reporting Standards.

When the G20 talks about strict new global regulation, that should include a ban on member countries unilaterally deciding that they don’t want to play nice with everybody else, and are going to have their own idiosyncratic and politically-motivated accounting standards.  Yes, America, that means you.

3 comments

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This rule change is akin to the Japanese style approach of not recognizing losses. Additionally, banks now have NO incentive to sell toxic assets. They will merely keep them on their books. Result…? Credit will NOT flow.

Why did the head of the Federal Home Loan Bank Office of Finance just resign? Because he knows that relaxing the mark to market is a means for the FHLB system to effectively cook their books.

If you care to read more, I believe this change is nothing more than Putting Perfume on a Pig

http://www.senseoncents.com/2009/04/putt ing-perfume-on-a-pig/

For its part, the IASB caved into to political pressure from the EC last October — it was given one day to make a rule change it was not disposed to make, but did make.

Posted by oscar | Report as abusive

First of all I hope Felix you are happy in your new home, keep up the good blogging!

Secondly, whilst I agree that the new FASB rules are dismal and short sighted, I do not think that retail investors should have an advantage over institutional investors, which is what you seem to imply in the post.

Ignorance of the law is no defense in a courtroom and ignorance of a companies’ financial position is no excuse either. Caveat centaur.