The End of the Virtual Financial Crisis

[Butterfly]

The G20 submit answers to banking stability is going to be pointless, a lot of words with little action behind. But something happened yesterday that is going to change everything back to where it was, FASB has decided to drop the "Mark to Market" rules for banks, finally.

So at the end it was all an illusion, forcing banks to declare bankruptcy and borrow more capital over nothing. Maybe they should have learn about their mistakes from the 80s when they did the exact same thing with S&L !!! I guess, we never learn from our past.

FASB Eases Mark-to-Market Rules - WSJ.com

U.S. accounting rule makers made it easier for banks to limit losses, but in an unexpected move they bowed to critics and backtracked on one proposal that would have let companies ignore market prices in some cases.

The vote by the Financial Accounting Standards Board followed a debate in which members of Congress pushed for steps to help banks weighed down by troubled assets, while some investor groups warned that the plans would allow executives to cover up losses. The rules change spurred Thursday's stock-market rally.

For the most part, the board ratified proposals it had put out for comment two weeks earlier, including changes that would lessen the need for banks to take an earnings hit when assets run into trouble. Financial stocks led the market up in the morning on the expectation that the rules would be approved, but faded and ended roughly on a par with the broader market.

Bankers argue that the "mark-to-market" principle of valuing assets at market prices is sometimes flawed because markets have ceased to function. They say that can lead to unnecessary alarm about the financial system's stability, an argument lawmakers have echoed.

One member of the five-member accounting standards board tried to address criticisms that the body had bowed to political pressure.

"We are an independent standard setter and it's important that we maintain our independence," said Lawrence Smith. But he said the board can't "ignore what's going on around us" as banks plead for help.

Under one of the changes adopted Thursday, the definition of an asset that is "other than temporarily impaired" will change. Once an asset gets that designation, it triggers a write-down in value that feeds through to the bottom line. In the case of banks, that may put capital below regulatory requirements.

Currently, to call an impairment temporary, management must assert that it has the intent and ability to hold on to the asset until its value recovers. Under the new rule, adopted by a 3-2 vote, companies could avoid the classification by stating that they intend to hold on to the asset.

Patrick Finnegan, director of financial reporting policy for the CFA Institute, said the move gives managers too much room to fudge the truth. "Financial statements are not there to reflect management's assumptions.," said Mr. Finnegan, whose group runs a self-study program for financial analysts.

The new rule draws a distinction that is especially relevant to mortgage-backed securities. The market for these securities has largely dried up, but banks say that most homeowners still are making mortgage payments.

The rule says that once an asset is permanently impaired, only losses related to the underlying creditworthiness would affect earnings and regulatory capital. Losses attributed to market conditions would be disclosed and accounted for elsewhere.

Business groups mostly commended the changes, but said they aren't enough. "Significant problems remain with asset valuations, and guidance is needed for auditors," the U.S. Chamber of Commerce said in a statement.

Some investors were relieved that FASB backtracked from one of its proposals, which would have allowed companies to ignore all market prices when coming up with a value for securities once a market was determined to be inactive.

FASB instead said that more weight should be placed on transactions when a market is operating in an orderly fashion and less when the market is less active.

[baldrick]

ok butterfly - I have here a lump of coal - in about a couple of million years it is going to be a massive diamond - I will use it as surety to borrow a few million. ok

[Butterfly]

^ not sure what your point is, the commodity rally already happened, time to get back to another low cycle for commodities

[sabang]

What safeguards are there on the banks valuation models? If it means I can value any old security how I want too within the Bank, this is dangerous- like every Bank potentially becomes another Enron.

[Butterfly]

^ the arguments is that those banks keep the security until maturity, there is no point into re-evaluating them, because the fair value of the security at maturity is what matters, not what the market perceives in a speculative model

This is already the case for bonds held until maturity, they are valued at historical cost (market yield at the time of issue though). Impairment only happens when there is no chance to recover that asset. There is simply no market volume for those "toxic" assets, that's not the same as no recovery or no fair value.

At the end it was just another case of one FASB rule contradicting common sense and in conflict with existing FASB rules. Like the uptick rule that is currently being reversed, it's one of those things that just plunged that market into cahos and panic over nothing, which proves how speculative and unreasonable markets have become (too many amateurs and stupid players)

[baldrick]

not sure what your point is

the value of the banks assets is what is used to decide how much money it can lend to borrowers

[Butterfly]

^ banks can't use "toxic" assets to do this. They have special reserve capital for that.

The "toxic" assets were bought mostly with their Net Equity (past cumulative profit + shareholder capital). Eventually their Net Equity became negative and that impacted all their ratios. Technically, they were bankrupt on paper even though they weren't. Very stupid situation.

[watterinja]

Wealth is an illusion...

The financial game is run by a bunch of confidence tricksters, charlatans & snake-oil salesmen. After this recent fiasco, who will believe their lies?