Tweet
ALL BUSINESS: Bank fix-it plans may collide
By RACHEL BECK – 23 hours ago
NEW YORK (AP) — Two plans to attack the credit crisis are careening into each other.
The Obama administration is trying to re-ignite lending by enticing private lenders to buy the toxic assets that have been stuck on the balance sheets of banks.
But the plan could be undercut by another initiative: relaxing accounting rules that determine how the assets are valued. That might boost the prices of those assets, making it harder to sell them.
[...]
For months, the government has struggled with how to deal with mortgage loans gone bad and other risky securities. The market for such assets has collapsed, which means the banks can't sell them off to investors.
At the same time, financial companies are required under the "mark-to-market" accounting rules to adjust the assets' values to reflect current market conditions. In other words, a pool of residential mortgages that a year ago was worth $100 million might today be worth $50 million. The bank holding that pool must reflect the loss on its books, even if it's just a paper loss.
That's one big reason banks have taken massive writedowns over the past two years. Those writedowns, in turn, have put a strain on their capital — the measure of how much money is on hand. Because banks are required to have certain minimum capital requirements, they have curbed lending to businesses and consumers to conserve their capital.
But now there is a glimmer of hope that a solution is on the way.
The goal of the Obama plan is to help create a market for securities nobody seems to want. The first step is to place a value on them because few people are really sure what they're worth.
Unveiled Monday, the plan will take up to $100 billion from the government's existing $700 billion financial-bailout pot. It will then pair that with private investments and loans from the Federal Deposit Insurance Corp. and the Federal Reserve to generate $500 billion in purchasing power.
Banks would unload their troubled assets and securities to investors. Investors, in turn, hope to eventually turn a profit.
But another plan to deal with the toxic assets could negate the government's effort.
For months now, banks and their lobbyists have called on lawmakers and regulators to suspend the mark-to-market rules. They claim the rules force banks to report huge paper losses, even on assets they don't plan to sell. The losses are artificial, they say. This has exaggerated the current crisis.
Supporters of mark-to-market argue that the rules provide investors with a clear picture of a company's finances at that moment. Without the rules, investors wouldn't be able to measure the impact of the housing and credit collapse. And besides, if the value of the assets increase, the companies will take big gains in the future.
But changes look more likely. Earlier this month lawmakers threatened to enact laws that would alter mark-to-market accounting if there was no quick fix from the Financial Accounting Standards Board, or FASB, which sets U.S. accounting rules.
"Relief is needed now and action must be taken immediately to help bring certainty to the markets," Republican Rep. Spencer Bachus of Alabama said during a session of the House Financial Services subcommittee.
On March 17, the FASB proposed changes that would give companies more leeway when valuing assets. One would allow for "significant judgment" on the part of bank managers to determine if a market isn't functioning. Executives then would have discretion over setting the value of the security.
The FASB is expected to decide on this toned-down version of mark-to-market as soon as April 2. If approved — which many in the industry believe is likely — companies could apply new valuation requirements in the current quarter, which for most companies will end in late April.
The fear is that companies will use this leeway to boost the value of the loans on their books to "unrealistic levels," said Robert Willens, an expert on tax and accounting issues for Wall Street clients.
"The FASB's relaxation of these rules might come at the most inopportune time," he said.
[...]
By RACHEL BECK – 23 hours ago
NEW YORK (AP) — Two plans to attack the credit crisis are careening into each other.
The Obama administration is trying to re-ignite lending by enticing private lenders to buy the toxic assets that have been stuck on the balance sheets of banks.
But the plan could be undercut by another initiative: relaxing accounting rules that determine how the assets are valued. That might boost the prices of those assets, making it harder to sell them.
[...]
For months, the government has struggled with how to deal with mortgage loans gone bad and other risky securities. The market for such assets has collapsed, which means the banks can't sell them off to investors.
At the same time, financial companies are required under the "mark-to-market" accounting rules to adjust the assets' values to reflect current market conditions. In other words, a pool of residential mortgages that a year ago was worth $100 million might today be worth $50 million. The bank holding that pool must reflect the loss on its books, even if it's just a paper loss.
That's one big reason banks have taken massive writedowns over the past two years. Those writedowns, in turn, have put a strain on their capital — the measure of how much money is on hand. Because banks are required to have certain minimum capital requirements, they have curbed lending to businesses and consumers to conserve their capital.
But now there is a glimmer of hope that a solution is on the way.
The goal of the Obama plan is to help create a market for securities nobody seems to want. The first step is to place a value on them because few people are really sure what they're worth.
Unveiled Monday, the plan will take up to $100 billion from the government's existing $700 billion financial-bailout pot. It will then pair that with private investments and loans from the Federal Deposit Insurance Corp. and the Federal Reserve to generate $500 billion in purchasing power.
Banks would unload their troubled assets and securities to investors. Investors, in turn, hope to eventually turn a profit.
But another plan to deal with the toxic assets could negate the government's effort.
For months now, banks and their lobbyists have called on lawmakers and regulators to suspend the mark-to-market rules. They claim the rules force banks to report huge paper losses, even on assets they don't plan to sell. The losses are artificial, they say. This has exaggerated the current crisis.
Supporters of mark-to-market argue that the rules provide investors with a clear picture of a company's finances at that moment. Without the rules, investors wouldn't be able to measure the impact of the housing and credit collapse. And besides, if the value of the assets increase, the companies will take big gains in the future.
But changes look more likely. Earlier this month lawmakers threatened to enact laws that would alter mark-to-market accounting if there was no quick fix from the Financial Accounting Standards Board, or FASB, which sets U.S. accounting rules.
"Relief is needed now and action must be taken immediately to help bring certainty to the markets," Republican Rep. Spencer Bachus of Alabama said during a session of the House Financial Services subcommittee.
On March 17, the FASB proposed changes that would give companies more leeway when valuing assets. One would allow for "significant judgment" on the part of bank managers to determine if a market isn't functioning. Executives then would have discretion over setting the value of the security.
The FASB is expected to decide on this toned-down version of mark-to-market as soon as April 2. If approved — which many in the industry believe is likely — companies could apply new valuation requirements in the current quarter, which for most companies will end in late April.
The fear is that companies will use this leeway to boost the value of the loans on their books to "unrealistic levels," said Robert Willens, an expert on tax and accounting issues for Wall Street clients.
"The FASB's relaxation of these rules might come at the most inopportune time," he said.
[...]
“Mark to market accounting” like a box of chocolates.
Momma Gump famously compared life to a box of chocolates. Pick one that looks good and take a bite, but you’re never quite sure what you are going to get. Forest’s Momma might have been an accountant working to be in compliance with FASB rule 157 otherwise known as “mark to market accounting.”
Anyone who listens to financial reporting these days has heard the term, but few of us know exactly what it means or what its effect has been on the current economic difficulties.
Essentially, the rule says that banks and financial institutions have a duty to value assets held for sale at a dollar value that the market is willing to pay for them. In normal times, this seems like a common sense way to do business.
These are not normal times. The assets being discussed have been deemed toxic. They are bundles of home mortgages many of which are in some stage of default. No one wants to buy them right now. And so the current rule says that the entire box of chocolates needs to be put on sale as if it were leftover candy on the day after Halloween.
The result is that the banks and other institutions have written down the value of these assets to very low levels or zero. The toxics (sounds like a Saturday cartoon show) appear as huge expenses on current profit and loss statements and damage liquidity ratios on balance sheets. It seems as if the banks have lost huge amounts of money.
Since the ability of banks to loan depends on the strength of their balance sheets, financing has ground to a halt. Government has ridden to the rescue and infused the banks with something called a TARP (sounds like a covering on the back of a pickup truck). Banks have been loaned billions of dollars to free up credit.
Much of this weakness is really an illusion. The assets are secured by real things (houses). They have value. Was too much money loaned to buy them? Yes, probably. Will banks recover most of what was loaned? Yes, eventually (that is if they keep them on the books as assets). If the Obama PPIP succeeds in moving some toxics off bank balance sheets will someone make money? It would seem so.
At some point, the assets will be sold. Banks that have valued them at zero will suddenly have a bonanza. They will appear to earn 100 percent at whatever price they sell.
Much of the current financial aggravation could have been avoided or minimized by a less draconian method of marking the values of the mortgages to their real value rather than to the value assigned by a frightened market today.
The Financial Accounting Standards Board (FASB) has promised a new look at rule 157 as soon as next week. May I offer you a chocolate? I have this box of mixed sweets…
Momma Gump famously compared life to a box of chocolates. Pick one that looks good and take a bite, but you’re never quite sure what you are going to get. Forest’s Momma might have been an accountant working to be in compliance with FASB rule 157 otherwise known as “mark to market accounting.”
Anyone who listens to financial reporting these days has heard the term, but few of us know exactly what it means or what its effect has been on the current economic difficulties.
Essentially, the rule says that banks and financial institutions have a duty to value assets held for sale at a dollar value that the market is willing to pay for them. In normal times, this seems like a common sense way to do business.
These are not normal times. The assets being discussed have been deemed toxic. They are bundles of home mortgages many of which are in some stage of default. No one wants to buy them right now. And so the current rule says that the entire box of chocolates needs to be put on sale as if it were leftover candy on the day after Halloween.
The result is that the banks and other institutions have written down the value of these assets to very low levels or zero. The toxics (sounds like a Saturday cartoon show) appear as huge expenses on current profit and loss statements and damage liquidity ratios on balance sheets. It seems as if the banks have lost huge amounts of money.
Since the ability of banks to loan depends on the strength of their balance sheets, financing has ground to a halt. Government has ridden to the rescue and infused the banks with something called a TARP (sounds like a covering on the back of a pickup truck). Banks have been loaned billions of dollars to free up credit.
Much of this weakness is really an illusion. The assets are secured by real things (houses). They have value. Was too much money loaned to buy them? Yes, probably. Will banks recover most of what was loaned? Yes, eventually (that is if they keep them on the books as assets). If the Obama PPIP succeeds in moving some toxics off bank balance sheets will someone make money? It would seem so.
At some point, the assets will be sold. Banks that have valued them at zero will suddenly have a bonanza. They will appear to earn 100 percent at whatever price they sell.
Much of the current financial aggravation could have been avoided or minimized by a less draconian method of marking the values of the mortgages to their real value rather than to the value assigned by a frightened market today.
The Financial Accounting Standards Board (FASB) has promised a new look at rule 157 as soon as next week. May I offer you a chocolate? I have this box of mixed sweets…
Pro-fair-price:
Jonathan Weil: Doors opened for banker fiesta
Jonathan Weil / March 27, 2009, 0:28 IST
The banks demanded that the accountants give them leeway in how they report losses to investors. The accountants responded by giving away their souls.
Last week, the Financial Accounting Standards Board (FASB) unveiled what may be the dumbest, most bankrupt proposal in its 36-year history. If it stands, the FASB ought to change its name to the Fraudulent Accounting Standards Board. It’s that bad.
Here’s what the board is floating. Starting this quarter, US companies would be allowed to report net-income figures that ignore severe, long-term price declines in securities they own. Not just debt securities, mind you, but even common stocks and other equities, too.
All a company would need to do is say it doesn’t intend to sell them and that it probably won’t have to. In most cases, it wouldn’t matter how much the value was down, or for how long. In effect, a company would have to admit being on its deathbed before the rules would force it to take hits to earnings.
So, if these rules had been in place last year, a company that still owned shares of American International Group Inc or Fannie Mae, for instance, could exclude those stocks’ price declines from net income entirely. It would make no difference that the companies were seized by the government last year, or that both are penny stocks. The loss would get buried away from the income statement, in a balance-sheet line called “accumulated other comprehensive income.”
Desperate bankers
These are the earnings we get when the people who write accounting standards give in to desperate bankers. And it’s no mystery why the three FASB members who voted for this — Leslie Seidman, Lawrence Smith and Chairman Robert Herz — did so.
Since the credit crisis began, the board’s members have been under assault by the banking industry and its wholly-owned members of Congress. The most recent display came last week at a House Financial Services Committee hearing, where Democratic Representative Paul Kanjorski and other lawmakers beat Herz like a dog. A FASB spokeswoman, Chandy Smith, confirmed my understanding of how the rule change would work.
The banks want unfettered licence to value their assets however they see fit, and to keep burgeoning losses out of their earnings and regulatory capital. The FASB had been holding its ground, for the most part. Now, though, the board has assumed the foetal position.
Differing treatment
Under the current rules, securities get differing accounting treatments depending on how they are classified on the balance sheet. When labelled as trading securities, they must be assigned marked-to-market values each quarter, with all changes flowing through to net income. Otherwise, changes in value don’t hit the income statement, unless the securities have suffered what the accountants call an “other-than-temporary impairment.”
While the term may be cumbersome, the idea is that companies need to show losses in net income once they no longer can pretend that an asset’s plunge in value is only fleeting. Think of a man who gets sent to prison for 20 years. That’s not necessarily a permanent sentence. Yet it’s definitely not temporary.
The board’s proposal tosses the old principle aside. Even if a loss is deemed not temporary, companies still would be allowed to keep it out of net income. There’s one exception: If a company holding debt securities concludes some of the decline is due to credit losses, that portion would need to be included on the income statement. Otherwise, the losses stay off.
Debt holders will say their losses almost always are due to something other than credit losses, such as liquidity risk, because it’s impossible to prove their judgements wrong. So the dents to net income will be minimal. That’s exactly what the FASB is trying to accomplish.
Investor protection
There is something investors can do to protect themselves: Ignore net income and start focusing on the real bottom line, a term called comprehensive income, which is found on a company’s statement of shareholder equity. General Electric Co, for example, reported $17.4 billion of net income for 2008 —and a comprehensive loss of $12.8 billion.
For years, the FASB has used comprehensive income as a dumping ground for losses that it has decided are too politically radioactive to be included on the income statement. These include changes in the values of corporate pension plans, foreign currencies, certain derivative instruments, and securities classified as available for sale. That’s why investors should stop giving credence to net income.
They have done this already with Tier 1 capital, the government’s main solvency measure for banks, which ignores lots of losses and treats some types of debt as if they were assets. Nowadays, bank investors are obsessed with a no-frills capital benchmark called tangible common equity. This leaves out intangible assets which acts like debt and must be repaid before common stockholders can claim any share of a company’s assets.
What’s good for the balance sheet is also good for the income statement. Enough with the fluff. Net is dead. The FASB might be, too, if it keeps this up.
Comment