In the height of the financial crisis, the Financial Accounting Standards Board were pressured to pass FASB 157 (“Fair-value accounting”).
Banks were complaining that some of their holdings were difficult to value, thinly traded, tough to mark. So 157 passes and it allows the accountants at banks to mark these to a model rather than the last trade.
Derided as “Mark-to-Make-Believe” it leads to this unfortunate situation: The same models that led to the unfortunate money-losing purchase decision in the first place are now being used to actually value these holdings. regardless of the obvious flaw in the model in the first place.
As these bad buys plummet in price, investors in banks have no insight into the loss potential — they are hidden from view, along with the true financial condition of the company. This sort of accounting fuckery would never be tolerated in a nation where investors mattered more than insiders and bankers. Instead, it rewards the incompetent and allows near insolvent banks to pretend they are solvent, thereby allowing the granting of huge bonuses.
Almost three years later, we see the results of the Accounting Board’s move. The large bailed out banks remain weakened. Like all wounded animals, they are very dangerous. They have institutionalized fraud, made forgery a business expense. ZIRP exists for the primary reason of allowing these banks to rehabilitate their faulty balance sheets. Savers get punished.
The same could have been accomplished much more quickly and cheaply through prepackaged bankruptcies. That would have required an uncorrupted Congress, an honest Accounting board and a willingness to allow capitalism in America. Instead, we had foisted upon us a convoluted form of Socialism for Financiers.
If you want to know why the Fed has maintained zero interest rates, you need only look at who remains employed at banks, at who gets blamed for their failure. The record low approval rating of Congress at least imply that the public isn’t utterly blinded by the scam.
All to save the asses of a few reckless, incompetent bankers. Something is very, very wrong with this system…
This post originally appeared at The Big Picture and is posted with permission.
2 Responses to “FASB Sold Out; Expected Results Followed”
Has any economist ever tried to put a value on the trading of stocks as we do today. I realize that the raising of capital by some means is required, but once a company is created it seems the quick turnover of its stock has little value.
Since trades in stocks profit the people with the most information, it pretty much guarantees that people with concentrated power will get a transfer of funds from those with less power. The stock market is then a massive transfer system from the middle class to the wealthy. And the more volatile the world becomes the more critical information becomes available and the more the powerful will benefit.
Thus our stock market raises money for companies and then assures a continued revenue stream for the powerful based on their much better access to information. If the government is inefficient in how it uses its tax dollars than this "information tax" is just another burden for the middle class.
Thus the inside information that the banks have is nothing more than one type of inside information that powerful people have. All the trades done by the powerful are essentially inside information. It is information that most all the people in the market can never afford to get. Even if they put their money in the hands of a manager it means they just have more information than some of the population, but no where near what say a hedge fund can acquire. If one could judge the value of a mutual fund and decide which is best, would not everyone be in that fund?
I think we must conclude the stock market is nothing more than a giant transfer system from the middle class to the wealthy and super wealthy.
This article is mis-informed, we aren’t Japan. The rules are contained here:
Mark-to-market was never suspended during the crisis. The change simply allowed companies with financial assets that were to be held for the forseeable future to recognize the change in value due to illiquidity in OCI. So in fact, all the credit risk has always run through the income statement and any illiquidity distortions run through OCI. All of the changes in value are actually in the financial statements. Also, don’t forget about the tiered level of fair value disclose. Lots of information there.