The Financial Accounting Standards Board agreed to ease their mark-to-market accounting regulations, and while the market appears to like it, other observers are more skeptical.
Perhaps hostile is the better word.
Banks have been howling that the accounting rules have unfairly pushed down the valuations of their assets since the onset of the downturn. But supporters think mark-to-market gives investors a fair assessment of what assets are worth and changes would allow banks to overvalue their assets.
The Dow Jones Industrial Average gained more than 300 points in earlier trading as the financial sector praised the plan, but bloggers have met the rule changes with trepidation, noting the unintended consequences of the reforms and a lack of trust surrounding the banks.
The fact that the FASB – an independent organization – was pushed by Congress to reform its rules is shameful, Dan Greenhaus of Miller Tabak writes in guest post at The Big Picture.
“I cannot fathom why investors would cheer less transparency and more involvement by management in the pricing of assets that they own,” Greenhaus says. “I have garbage pail kids cards from 1987 that I still think are worth $20 each. Does that make it so?” He also notes the government is “effectively undermining” its own plan to purchase toxic assets because banks won’t sell unless they get what they feel is fair value.
If I am a bank and I believe asset X is worth 80 cents if held to maturity but the market is pricing it at 40 cents, FAS 157e gives me even more room to carry said asset at 80 cents which reduces the necessity of selling it in the meantime.
FASB’s moves take effect during the 2Q financial reporting period for most companies, which is a twist from earlier reports which had the board retroactively applying the changes to 1Q results. Barron’s Bob O’Brien notes the repercussions of the move for banks as earnings season approaches.
“On the face of it, that would seem something of a loss for bank,” O’Brien says. “But what it really does is make the first-quarter results pretty ineffectual.” Consequently, banks can get away with reporting bad 1Q results – even though many said they were profitable in January and February – and promise a big quarter-over-quarter increase.
Ultimately, today’s moves should be labeled as a disgrace, John Jansen writes at Across The Curve.
There is a mob, akin to the mob in London yesterday calling for the dissolution of capitalism, prodding the FASB to change accounting rules in order for banks to apply substantial judgement when valuing assets. Toxic ones. Toxic ones where there is no market. When they cave in to this they can drop the S from their acronymic name as they will lack any Standard.