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Monday, July 27, 2009


the return of mark-to-market?

pragmatic capitalist highlights jonathan weil and movement on the FASB changes instituted in the panic of early 2008.


It was only last April that the FASB caved to congressional pressure by passing emergency rule changes so that banks and insurance companies could keep long-term losses from crummy debt securities off their income statements.

Now the FASB says it may expand the use of fair-market values on corporate income statements and balance sheets in ways it never has before. Even loans would have to be carried on the balance sheet at fair value, under a preliminary decision reached July 15. The board might decide whether to issue a formal proposal on the matter as soon as next month.

“They know they screwed up, and they took action to correct for it,” says Adam Hurwich, a partner at New York investment manager Jupiter Advisors LLC and a member of the FASB’s Investors Technical Advisory Committee. “The more pushback there’s going to be, the more their credibility is going to be established.”

The scope of the FASB’s initiative, which has received almost no attention in the press, is massive. All financial assets would have to be recorded at fair value on the balance sheet each quarter, under the board’s tentative plan.

This would mean an end to asset classifications such as held for investment, held to maturity and held for sale, along with their differing balance-sheet treatments
. Most loans, for example, probably would be presented on the balance sheet at cost, with a line item below showing accumulated change in fair value, and then a net fair-value figure below that. For lenders, rule changes could mean faster recognition of loan losses, resulting in lower earnings and book values.

The board said financial instruments on the liabilities side of the balance sheet also would have to be recorded at fair-market values, though there could be exceptions for a company’s own debt or a bank’s customer deposits.


FASB knows they made a mistake and got pressured by politicians and the Treasury to change the rules in the middle of the game. Well, now they’re considering changing them back (kind of). The rule change would have sweeping effects on the banks and as regular readers know, I believe would have an enormously positive impact on the long-term well being of the country.

Are we beginning to see the opposite of the March rally where regulatory action lined up in favor of a market rally? When the mainstream media finally starts reporting this story don’t be shocked if the bank stocks fall under pressure or experience a general bout of weakness amidst the uncertainty. And without the banks, it’s unlikely that this market will go anywhere fast. Stay tuned.

these changes were a key piece of the radical rewrite of the regulatory environment which put a floor under the spiraling collapse that reversed (at least for now) in march. maintaining the ability of the banks to hold no reserves against severely remarked securitizations was essential; the banks in the end, courtesy of the FASB, got to have their cake and eat it too, not having to recognize losses on securities while not being forced into massive capital reserving. pragcap might be right about the long-term effect of these huge proposed reversals -- but the anticipation of the short-term effect might help explain the recent underperformance of financial shares in the market.

in the end, as david merkel has said, you can't account away cash flows -- if these securitizations don't pay back principal and interest, the accounting treatment is just a delay. but these changes would re-accelerate the realization of the damage on bank balance sheets and remove a significant time cushion.

UPDATE: i should have added a link to this earlier post wherein david goldman noted the accumulation of high-yielding securitizations on the books of banks as they seek recapitalizing yield. it's hard to imagine FASB winning this war.

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