Fudging the Books Won’t Boost Bank Assets
The FASB, or the Financial Accounting Standards Board, decision to ease mark-to-market accounting rules yesterday provides an official open door policy for banks to fudge the books. This is not the way to regain bank or financial sector trust.
Mark-to-market accounting has been blamed for exacerbating the credit crisis because banks were previously required to value assets based on current market prices. Since most of their toxic assets remain poorly bid or largely illiquid, clogging balance sheets and making it difficult to emerge from the financial crisis, bankers can now breathe a sigh of relief by creating their own version of “fair value” for mostly complex and trashy mortgage-backed securities.
In their desperation to boost confidence and lending in the battered banking sector, accounting officials have basically cleared the way for banking executives to hide or cover-up losses. This policy is the equivalent of allowing your kids to eat as much candy as they like and then telling them “it’s okay, no problem; it won’t do any harm.”
Of course, consuming too much candy or sugar is unhealthy and ultimately leads to tooth decay and cavities. That’s how to best explain the rotten state of banking where executives can now formulate their own asset models and mark clogged assets to their “fair value” assumptions.
According to the CFA Institute in the United States, the move gives managers too much room to fudge the truth. “Financial statements are not there to reflect management’s assumptions,” claims Patrick Finnegan, the director of the institute.
The decision by the FASB provided a boost to banks yesterday as the KBW Bank Index gained 1.8%. But some financial services companies, including investment banks, didn’t participate in the rally.
At this point, I’ve lost faith in regulators, the government and the banking system.
The FASB is now officially a conduit for Congressional policy and has completely lost its independence. If the banks can now create a fair value model for toxic assets then it’s fair to assume that one day another massive financial crash will hit the system; the next meteorite to slam the financial markets will probably be the last one. The government, banks and the regulators have failed us miserably.
The FASB made a big mistake yesterday, violating conservative accounting principles and abandoning any hope of instilling confidence in an industry that has completely lost the support of the public. The FASB along with Congress have just delayed the inevitable. Obviously, nobody has learned a thing from the ongoing credit crisis – we’re just repeating the same mistakes that triggered the mess in the first place.
Have a good weekend. See you on Monday.
Mark-to-market accounting has been blamed for exacerbating the credit crisis because banks were previously required to value assets based on current market prices. Since most of their toxic assets remain poorly bid or largely illiquid, clogging balance sheets and making it difficult to emerge from the financial crisis, bankers can now breathe a sigh of relief by creating their own version of “fair value” for mostly complex and trashy mortgage-backed securities.
In their desperation to boost confidence and lending in the battered banking sector, accounting officials have basically cleared the way for banking executives to hide or cover-up losses. This policy is the equivalent of allowing your kids to eat as much candy as they like and then telling them “it’s okay, no problem; it won’t do any harm.”
Of course, consuming too much candy or sugar is unhealthy and ultimately leads to tooth decay and cavities. That’s how to best explain the rotten state of banking where executives can now formulate their own asset models and mark clogged assets to their “fair value” assumptions.
According to the CFA Institute in the United States, the move gives managers too much room to fudge the truth. “Financial statements are not there to reflect management’s assumptions,” claims Patrick Finnegan, the director of the institute.
The decision by the FASB provided a boost to banks yesterday as the KBW Bank Index gained 1.8%. But some financial services companies, including investment banks, didn’t participate in the rally.
At this point, I’ve lost faith in regulators, the government and the banking system.
The FASB is now officially a conduit for Congressional policy and has completely lost its independence. If the banks can now create a fair value model for toxic assets then it’s fair to assume that one day another massive financial crash will hit the system; the next meteorite to slam the financial markets will probably be the last one. The government, banks and the regulators have failed us miserably.
The FASB made a big mistake yesterday, violating conservative accounting principles and abandoning any hope of instilling confidence in an industry that has completely lost the support of the public. The FASB along with Congress have just delayed the inevitable. Obviously, nobody has learned a thing from the ongoing credit crisis – we’re just repeating the same mistakes that triggered the mess in the first place.
Have a good weekend. See you on Monday.
»
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