Socio-Economics History Blog

Socio-Economics & History Commentary

FASB : Here comes Mark To Fantasy Accounting!

  • FASB is ‘easing’ the Mark to Market rule to essentially allow all these insolvent banks to price all their toxic assets at whatever price they view as proper, ie Mark to Fantasy. This is seriously bad news for transparency and accountability.
  • Suppose a bank buys an asset which cost US$1 B a year ago and the price of similar/same asset goes down to US$100M currently. In fair value accounting using mark to market principle, the asset bought at US$ 1B should be priced at US$ 100M in the books. This means that this bank has suffered a US$ 900M paper loss and the balance sheet, profit and loss statement must reflect it as such.
  • But in allowing banks to escape from this mark to market rule, banks can price toxic assets at whatever. How then can you trust their financial statements? How then do you assess whether they are adequately capitalize or otherwise?
  • It is bad enough that alot of these toxic derivatives are placed under off balance sheet items to hide them. Now with this rule change, it is almost as good as legalizing fraud. America is going from bad to worse. These banksters and their cronies are taking over the country big time. They are sending America down the road to 3rd world country status with dubious rules and regulations.
  • Bloomberg reports :
    The Financial Accounting Standards Board, pressured by U.S. lawmakers and financial companies, voted to relax fair-value accounting rules that Citigroup Inc. and Wells Fargo & Co. say don’t work when markets are inactive.
    Changes to fair-value, or mark-to-market accounting, approved by FASB today allow companies to use “significant” judgment in gauging prices of some investments on their books, including mortgage-backed securities. Analysts say the measure may reduce banks’ writedowns and boost net income. Firms could apply the changes to first-quarter results. 
    House Financial Services Committee members pressed FASB Chairman Robert Herz at a March 12 hearing to revise fair-value, which requires banks to mark assets each quarter to reflect market prices, saying it unfairly punished financial companies. ….
    Banks rely on competitors’ asset sales to help determine the fair-market value of similar securities they hold on their own books. FASB’s staff conceded the March 17 proposal led to a “presumption” that all security sales are “distressed” unless evidence proves otherwise. Such an interpretation might have let financial firms ignore transactions in valuing assets.
    FASB staff said banks should only disregard transactions that aren’t “orderly,” including situations in which the “seller is near bankruptcy” or needed to sell the asset to comply with regulatory requirements. The staff said in a report today it was not FASB’s intent “to change the objective of a fair-value measurement.”
    Fair-value “provides the kind of transparency essential to restoring public confidence in U.S. markets,” former Securities and Exchange Commission Chairman
    Arthur Levitt said in an interview yesterday.
    Levitt is co-chairman, along with former SEC head
    William Donaldson, of the Investors’ Working Group, a non-partisan panel formed to recommend improvements to financial regulation.
    “The group is deeply concerned about the apparent FASB succumbing to political pressures,” he said. Levitt is a senior adviser at buyout firm Carlyle Group and a board member at Bloomberg LP, the parent of Bloomberg News.
  • Nicholas Jones opines :
    The Final Truths, Motives, and Profit Opportunities
    Marked to market accounting allows us some transparency.  Removing FAS 157 is absurd and criminal.  The whole argument behind removing marked to market is that these assets are perceived to be worth more down the road than their current value.  This is simply not the case.  These ideas are based on the same ridiculous scenarios that Obama based the budget deficit on (tax revenues in an economy that will decline by 1.2% in 2009 and grow by 3.6% in 2010…funny).  The “theoretical” asset values are established on a completely unrealistic economic outlook; I mean it’s not even close.  When it’s all said and done, the banks will be lucky to get 5-10 cents on the dollar.  They will probably be better off finding willing buyers now than they will in 18 months.
    So here’s the real reason why the government will ban marked to market accounting.  By removing marked to market, the banks will no longer have to claim the associated unrealized losses on the derivatives; and marking them to magic (mark to model) will reduce the losses from writing the derivatives down.  It’s just another way to hide the assets from the balance sheet.  Another aspect of marking the CDS to magic is that the Fed will be able to grow its balance sheet (already surpassed $2 trillion) faster and more efficiently.  I fully expect the Feds to grow their balance sheet by 4 or 5 multiples from current levels. 
    The President, Congress, Fed, and Treasury sure talk about bringing transparency, but actions speak louder than words.  They have their twisted reasons.  Like everything else the government mettles in, the imbalances they create are really opportunities to make money.  For the above mentioned reasons, by banning marked to market you can fully expect the banks to start churning out a couple of profitable quarters.  The pundits will proclaim the recovery is on, which is really the ultimate goal of the government.  Markets will rally and Obama will say I told you so.  Then there’s people like you and me who recognize it for what it is and take this opportunity to profit.  This false rally will be a great time to get short the financials.  It’s a second chance for everyone who missed the massive downside move the first time.


April 3, 2009 - Posted by | Economics


  1. […] Standards Board (FASB) gives firms more leeway in valuing assets” |…FASB : Here comes Mark To Fantasy Accounting! « Socio-Economics History Blog…Isaac on FASB’s Mark-to-Market Proposals | Economic Policy | Bob McTeer | NCPA…fasb | […]

    Pingback by Hot News » Fasb | April 4, 2009

  2. Can anyone tell me how to obtain this?

    Yuri Biondi and Tomo Suzuki (2007) Socio-economic impacts of international accounting standards: an introduction; Socio-Economic Review; 5(4): 585-602

    Comment by Money Maker | April 5, 2009

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