April 02, 2009

FASB rewrites 157

This has only needed to be done for, oh I don't know, MORE THAN A FUCKING YEAR. Seriously, it was fall of 2007 when we first started talking about this crap. Little did I know it would lead us to the worst recession since World War II.

Under intense political pressure, the board that sets accounting rules in the United States will meet on Thursday to complete changes in accounting rules that are aimed at reducing the losses banks have been forced to report as the values of their mortgage-backed securities have crumbled.

The changes, proposed two weeks ago after a Congressional hearing in which Robert H. Herz, the chairman of the Financial Accounting Standards Board, was essentially ordered to change the rules or face Congressional action, are generally supported by banks, although some want the board to go even further.

Oh, but before you get too excited at rationality's sudden return, here's what they're going to allow...

The proposed rule interpretations deal with two issues in asset valuation. Banks are required to show some assets at market value, and report profits or losses based on changes in that value. Other assets may be reported at original cost, but if their value deteriorates they must be written down to market value if there is an “other than temporary impairment” in value.

The banks argue that current market values are unreasonably low, reflecting distressed trading, and are producing values that are well below the amount that will eventually be realized.

One change would allow banks much more room to conclude that inactive markets are distressed, allowing them to value the assets at what they believe they would be worth in a normal market. The other change would let banks avoid reporting some of the impairment losses on their income statements.

Roughly translated, this allows the banks to mark the value of certain illiquid assets (like mortgage backed securities and CDO's that contain a wide variety of securitized paper in tranches that may (or may not) be performing) to whatever arbitrary value they like. No need to bother with cashflow analysis, actual vs. expected performance, credit quality or anything else. Just tell us what you think it's worth and that'll be fine.

Investor groups are understandably pissed because now we'll have no idea how large the holes really are on the balance sheet. Meaning no one is going to know what these companies are really worth. Which also means few will be willing to invest and lend to them, further exacerbating the credit crunch.

Can we PLEASE, at some point, start valuing off performance of these securities? I'll even throw in a carrot by letting y'all generate an estimate of value based on recovery in the non-performing assets. PLEASE?

Posted by mcblogger at April 2, 2009 08:35 AM

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