Ever since the financial crisis made it all too clear that all US banks would be insolvent if their assets were marked anywhere near fair market value, Bank Holding companies received a green card to actually represent any of their securities "held to maturity" at anything else than mark-to-model/myth/unicorn on their books. Obviously models miraculously priced all barely cash producing loans at par, and with "out of sight, out of mind" receiving the full blessing of the administration's treatment vis-a-vis an insolvent banking system (i.e., no risk, all return), investors realized they have nothing to fear as pertains to the asset side of bank balance sheets, they ended up purchasing such otherwise undercapitalized companies as Citigroup (and soon, incidentally, Government Motors, which as Jonathan Weil reported recently, would have an equity value of negative $6 billion if the bankrupt company's $30 billion in goodwill assets was removed). Well, the FASB has just fired a semi-warning salvo at the banking system with a new proposed rule that would seek the gradual return of that long lost concept known as mark-to-market.
However, while not going all the way and demanding that everything on the balance sheet flowed through the income statement's bottom line, the FASB has decided to give banks the leeway of accounting for MTM adjustment in the bottom bottom line, which few if any ever look at (and certainly not sellside bank analysts): the Other Comprehensive Income line. Yet since this would at least optically disclose just how bankrupt most US lenders are, the ABA has gone nuts on the FASB and has decided to pull its one Mutual Assured Destruction wildcard: lending, claiming: "the proposal would greatly undermine the availability of credit by making it difficult to make many long-term loans, the value of which, even if performing perfectly, would likely be reduced on the day a loan is made." The fact that it would also show just how broke the state of US finance truly is, seems to have been omitted from the ABA's complaint.
More from Mark-To-Market Debate:
The Financial Accounting Standards Board has proposed new rules under which banks and other lenders would be required to use mark-to-market accounting.
Banks would have to report both the fair value and amortized cost of loans and some other financial assets and liabilities on their balance sheets under the new rules. Changes in fair value would, in most cases, be recognized in other comprehensive income and could cause swings of billions of dollars in the book values for the biggest lenders.
Sure enough, one look at the bolded text is all it took for the ABA to go all up in arms over the proposal which all but screams that the "emperor is naked."
The American Bankers Association released a statement that said the accounting change would present “significant problems, not only for banks, but also the general economy. If implemented, the proposal would greatly undermine the availability of credit by making it difficult to make many long-term loans, the value of which, even if performing perfectly, would likely be reduced on the day a loan is made.”
Ah, good old MAD - don't touch the status quo, or else. In the meantime please continue the borken Keynesian scheme of funding is in perpetuity, while we cover up just how broke we are, all the while receiving tens of billions in bonuses for dragging the American financial system into the ground.
To be sure, even with the full implementation, banks would still have at least 3 years to collect full bonus payments:
The rules would take effect for the biggest banks as early as 2013. Smaller banks, with less than $1 billion in assets, would be permitted to wait until 2017. The FASB is seeking comment through September 30, 2010.
We disagree with MTMReport's conclusion:
This is restrictive and gets it half right. Report the fair value, disclose it and keep it current. But don’t hit the lenders in the O.C.I. This will discourage lending. Period.
It doesn't matter if the MTM impairment is run through the income statement at all: investors can do their own math. We all know banks earnings are a scam, however if at least the fair value of trillions in "assets" was disclosed we could all do the simple subtraction (note: not addition) from book value to determine just how many billions the book (and this market) equity is underwater by. The bottom line is that unless the ABA once again manages to outbluff the accounting system, which is nothing but a token facade for legitimacy and representation, the double dip for banks is about to join the double dip in housing, which CNBC already reported on earlier.