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Wednesday, April 1, 2009

WSJ on the conflict between FASB changes and Treasury plan

FASB is under intense pressure to change mark to market rules.  Since the powers that be can’t change the market, they’ll have to change the marks.  Instead of marking assets at market prices, assets will be marked to where the holder believes it will sell it.  Any pricing system contingent on the beliefs of the holder is terminally flawed and subject to question.  Furthermore, the banking industry is widely perceived to have been under-regulated and overly risky.  We’re going to allow them to use more judgment?  When did we start trusting their judgment again?  Changing standards does not inspire confidence, it turns every balance sheet into a minefield and reduces market participants’ ability to game their counterparties.

This is a giant mistake.

-- WSJ(4/1) UPDATE: Easing 'Mark' Rule May Subvert Treasury Plan --

   By Heidi N. Moore

  A new accounting rule set to be approved this week will relax mark-to-market
rules for banks sitting on billions of dollars in toxic assets, making it more
attractive to keep the assets on their books. Yet those changes may undermine a
larger U.S. Treasury plan to rid the banks of those same assets, bankers and
accounting experts say.

  The Financial Accounting Standards Board is proposing significant changes to
its mark-to-market rules, allowing banks to set their own values for certain
hard-to-value troubled mortgages, corporate loans and consumer loans. The new
proposal, called FAS 157-e, is scheduled for a vote this Thursday.

  The change was meant to assist U.S. banks after bankers complained current
mark-to-market accounting rules forced them to undervalue their assets, by
setting prices at deeply discounted, fire-sale values.

  Once the new accounting rule takes effect, banks will have new incentive to
keep the assets directly on their books, say bankers. That is because the rule
states that banks can use their own judgment on asset values as long as there
are no willing bidders to set a market price.

  "There is no clear definition of what a toxic asset is," said Christopher
Hoeffel, president of the Commercial Mortgage Securities Association. "Some
bankers are saying, 'I don't want to sell these assets, because the loan might
still be good -- and if I hold it to maturity, I might get my money back.'"

  That seems to run counter to the Treasury plan, which could spend up to $1
trillion to remove impaired assets from banks' balance sheets. There is strong
Wall Street support for Treasury's program, with some investors advocating a
complete cleanup of assets via the Treasury program.

  "There is a disconnect there between the two plans," said analyst Robert
Willens, who follows tax and accounting issues for the Willens Report.
"Arguably, this new FASB rule will actually inhibit people from doing what the
Treasury secretary would like them to do, which is sell the toxic assets. There
is a little bit of the lack of coordination between the two concepts."

  If approved, FAS 157-e will give banks more leeway to determine what
constitutes a "market."

   (END) Dow Jones Newswires

  03-31-09 2241ET

  Copyright (c) 2009 Dow Jones & Company, Inc.- - 10 41 PM EDT 03-31-09

Source DJ     - Dow Jones                                         

1 comment:

Roy Howard said...

Nassim Taleb agrees.

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