Market Talk

No, no, no, it's worth what we say it's worth now.

The next time you hear somebody drone on about how healthy the banks are and how the worst is over, just remember the lede of this Reuters story:

Half of the losses suffered by banks could still be hidden in their balance sheets, more so in Europe than in the United States, the International Monetary Fund’s chief, Dominique Strauss-Kahn, was quoted as saying on Tuesday.

I’ve long thought that the most underappreciated bank bailout was the move by the Financial Accounting Standards Board, or FASB, to alter mark-to-market accounting rules back in March, the effect of which was to weaken the standard. This took the pressure off the banks to recognize losses on the assets on their balance sheets, and has miraculously coincided with an historic stock-mark rally, led largely by bank stocks.

FASB caved under massive pressure by the banks, of course, but also by the banking lobby, and Congress; you know, the people who love to grandstand about things like executive bonuses.

US banks, if I remember correctly, wrote down well north of $500 billion worth of so-called “toxic assets” during the bad days of the credit crisis, and the global total was over $1 trillion. So is the IMF worried that that much more is still sitting on banks’ balance sheets?

We may yet find out. Because while FASB caved in the spring, they’re considering changes that would actually strengthen mark to market rules, including having it cover loans, my colleague Michael Rappoport tells me. That would shine an awful lot of sunlight on the banks’ books, and we might find out just how prescient the IMF is.

(Hat tip to Barry Ritholtz over at The Big Picture.)