26 Sep Banks Want Out of Tough Accounting Rules
The current credit meltdown is happening because banks and Wall Street borrowed heavily on assets (mostly our mortgages) which are not worth as much as they thought. But bankers believe it would be better if they didn’t have to admit that.
In the past, accountants have been to blame for helping various companies hide the true condition of their finances. Anyone remember Enron? That might be happening in some parts of the current financial community. But there’s strong evidence that the accountants are trying to make sure the books of corporate America are complying with the rules. And their banking customers don’t like it.
The Wall Street Journal‘s David Reilly reported today that the American Bankers Association (ABA) is trying to convince the Securities and Exchange Commission (SEC) to give banks more leeway. Currently, if an investment in a bank’s portfolio is down a little in day-to-day trading, it might not particularly hurt the bank. But if that investment stays down — or keeps going down — for a lengthy period of time, then the bank must recognize it has a lower market price and “mark down” the value.
This “mark to market” requirement can mean that a bank must raise more capital from somewhere to stay in compliance with its banking regulations. So if the SEC would just allow the banks to pretend those mortgages they hold are more valuable than they actually are — on the theory that someday, eventually, maybe they’ll go back up so therefore they have a higher “fair value” than the market says — then the bank wouldn’t have to raise more capital and everyone could go back to business as usual.
The last I checked, didn’t American capitalism stand for the proposition that the “fair value” of something was what the market would pay you for it? If the market itself doesn’t put as much value on your old snow sled, then it doesn’t really matter how much you love dear Rosebud, does it?
As I’ve mentioned before, these kinds of rules have been in place for more than a decade. The purpose was to make the books of public and regulated companies more accurate, and to force these institutions to deal with problems instead of hoping and praying they will get better, someday. The investor or other lenders can then decide whether to “hope and pray” in lending or buying into the business, warts and all.
There’s already some hint that banks are hedging the truth on their own costs of borrowing money (in the LIBOR market) out of fear they will trigger their own collapse. And there are strong hints in the Lehman Brothers’ bankruptcy that accountants are still letting some banks be very generous in their valuation of collateral.
So apparently the banking industry thinks that having less clarity, more guesswork in their book-keeping, and perhaps a set of rose-tinted glasses, will be a good thing for the American market.
We’re pretty dumb sometimes, but hopefully we’re not stupid.
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