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 . . .
Category: Bailouts, Legal, Really, really bad calls, Regulation
Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.
Prepackaged bankruptcies would mean new management. New management may not see campaign donations as an important business expense. Consequently, the US government could not promote prepackaged bankruptcies. Instead FAS 157 assured banks would return to “profitability” and consequently bonuses would be paid and the subsequent campaign donations would be made.
The creativity employed by those who name these procedures such as”fair value” is astounding. George Orwell would smile in his grave. And how can anyone be against “fair value” the first word is fair. It’s like being against having everyone paying their fair share of taxes.
When I worked at an investment bank (as an attorney), I preferred the term “mark-to-myth.” The suggestion was not well received.
The good news? is that they are sowing the seeds for a new financial crisis.
At that point in time, there will most likely be new national management on board with a lack of political will to save the bank’s managements’ butts at all costs. I don’t think we will see new TARP, ZIRP-like things without wholesale replacement of bank managements, possibly in pre-pack bankruptcies.
Things like MF Global are hitting the heartland folks that are normally very conservative, so slowly the message is getting out that the politicans and financial companies are in cahoots to screw the individuals.
It should have been done in 2008-2009, but I think it will eventually get done in the next round when everybody realizes tha tthe rhetoric that Dodd-Frank will prevent another crisis was simply hot air.
Unfortunately, the real recovery will have been delayed several years at that point.
You have exactly summarized my biggest frustration with the post-crisis actions (or inactions) by the corrupt politicians and bankers. The 2 obvious solutions:
1. campaign finance reform and term limits – we need politicians representing the interests of the electorate – properly structured bank regulation and oversight will follow
2. a thorough re-structuring of the role of the Fed – they are hopelessly conflicted. They are out-of-control with their monetary policy (ZIRP & QE in particular). But it’s beyond ridiculous that they have any bank regulation authority (never mind the increased responsibility since the crisis)
Fix these and the positive effect on the economy will be dramatic.
Did not the “mark-to-market” rule get suspended back in March 2009 – at about the bottom of the market? And, was not the “mark-to-market” rule a relatively new rule?
I think you right about the banks, but wrong about the Fed. The policy of re-inflating busted banks is certainly unfair, and probably economically dubious. But the ZIRP is justified by economic conditions, specifically high unemployment and low capacity utilization, regardless of the condition of the banks.
Aren’t these the same games and nonsense the US accused Japan of in the ’90s? Weren’t we advocating for the oxygen tanks to get pulled and see what Japanese banks could actually breathe on their own?
Now how does it feel with the other shoe on our foot?
Cannot blame Japanese bankers if they feel a little schadenfreude…
It is amazing that there is not widespread outrage over the whole debacle. Essentially, nothing has changed — yet the public debate is stuck on mostly superficial issues. Frustrating.
Rock on Barry.
Coupled with the reluctance of the banksters to move homes with unpaid mortgages to non-performing and sell their massive shadow inventory the banks have “shadow” losses too. Nothing will be divulged until there is another crisis, a cash flow crisis at the fraudulent banksters.
Probably should ignore the P&L and balance sheet fantasy and watch the cash flow, there will be no problem until there is no cash. This is candy store accounting. When the banks want MTM to goose their reported earnings the FASB gives it to them, when MTM bites them in the ass it gets suspended. But when the money is gone it gone, except for ZIRP loans from the FED and benevolent “investments” and zero cost guarantees by Treasury.
PS, I wonder why Romney wrote the op-ed piece about structured BK for auto industry and not the banks?
right
to be clear, FASB accounting not all that great or properly marked in 2009,
and that suspension in my view was not huge
this is not rocket science, you should basically price your assets honestly
at what they might be sold for in a reasonable period say 6 months
or valued some other honest way like a decent nonfantasy cash flow accounting for risks
The FASB actually has a proposal out to do accounting both ways
the lame way now and ALSO a mark or fair value everything
i think the mark everything extreme-to big to discuss here– but then you could at least pick and choose?
But the elephant sellout is the FASB
with Herz the former chair and author of this plan fired
letting it die a quiet death-
-and at some point they will no sdoubt quietly pull the plug on it
McMike you are embarassing yourelf
in effect repeating the kudlow “analysis”
that says the April 2009 beginning of the stock market rally was “caused” by the FAS 157 suspension??
maybe you can explain how a return to hiding losses reassured the stock market?
Bravo! BR is one of the few who really calls out all the BS that is going on.
Last sentence is a little simplistic. The Swedish solution would have caused severe pain way beyond “a few reckless, incompetent bankers”. The problem is that when $10 trillion is lost that is going to produce a lot of pain. I agree that it is horrible that we have allowed the banksters to NOT share any of that pain. But there is not nearly enough money in the pockets of the guilty people to absorb all that pain – one way or another innocent people will have to suffer the majority of the pain. That is why it is such an outrage that we allowed these people to create the pain in the first place and have not even instituted laws and regulations to prevent them from doing the same thing again.
“But the ZIRP is justified by economic conditions, specifically high unemployment and low capacity utilization, regardless of the condition of the banks.”
I’m not aware of any immediate evidence of how ZIRP has ameliorated either unemployment or low capacity utilization. At this stage it is proving a highly disruptive piece of monetary policy, preventing real price discovery and throwing savers/young families/fixed income families & retirees under the proverbial bus.
You don’t have to be and adherent to the self-regulating/free market dogma in order to find some good reasons for hating current Fed policy. Even Karl Polanyi indicated how monetary policy holds undue sway over the interests and economic identity of the public, ultimately determining the manner in which we are able to live our lives; everything from new household formation to a farmer planting his crop is shaped by the Fed’s experiment.
“It is amazing that there is not widespread outrage over the whole debacle. Essentially, nothing has changed — yet the public debate is stuck on mostly superficial issues. Frustrating.”
I think that’s why a lot of folks are unwilling to concur that the US economy is in any kind of recovery; in a way, it serves as a tacit vindication of the bailouts and of current toothless bank reform policy.
“All to save the asses of a few reckless, incompetent bankers.” The bond holders are the real winners….they should have been liquidated or severely cut back long ago…make a crappy investment…get a crappy return.
naked capitalism has an excellent post today related to the mortgage fraud that is written by abigail field which documents how the revolving door between big govt and big finance is to the detriment of the rest of americans. she shows a trail of the connection/corruption between the d.o.j. and the o.c.c. that will sicken any honest person.
i think the mortgage fraud and the fasb 157 fraud are linked together and they show how BOTH political parties scam us. obama, holder, dodd, and frank are all worse than worthless. same for bush and his group. and clinton and his crowd.
wake up voters.
amen pantmaker
much of this farce and the accounting “darkside”s” money talks
is the bondholders
they have bought the modern face of “finance”
no writeoffs in a downcycle
or allow me to speak euro
no PSI Private Sector Involvement
As I recall FASB was pressured by Cong to make this change so they too can claim they “took one for the team”!
and speaking of bondholders
check out the Fair Value Coalition
a giant money avalanche
completely 100% dedicated to fighting fair value. Hello Orwell.
a huge collection of at least 40 life co pension fund and other bondholders
orchestrated by the Chamber of Commerce…
you could publish their names?
Bang the f*ck on Barry. To put it bluntly.
As a diligent saver and overall responsible person when it comes to personal finance, I am not amused to see policy put in place to benefit those that should be in jail.
Mark to market accounting = solving for X
The system is infected with viruses.
Ahodge- the bond holder bailout is the least covered piece of this entire puzzle. The scare tactic that somehow the money of the actual bank account holders was in jeopardy worked! Bond holders saved….blows my mind.
@Barry: Far f*cking out! Keep pressing the issue!
@DeDude said: “The Swedish solution would have caused severe pain way beyond “a few reckless, incompetent bankers.” ”
I think you’re kinda missing the point here. There was NO WAY to avoid causing severe pain given the damage done by the reckless misallocation of resources by banks and Wall Street. To suppose otherwise is fallacy, if not outright fantasy.
Rather than address the situation directly and responsibly through bankruptcies, the response from the Fed and Treasury has been to mask, conceal and divert our focus by every means possible (i.e. TARP, TALF, ZIRP).
Their prescription has been to “treat” the cancerous perpetrators of the crisis with mild tonics and salves, but have only delayed the inevitable surgery to remove the underlying disease. The net result is the illness is exacerbated by the malignant growth of mounting debts and a weakened currency, draining the life from our economic corpus.
So, let’s end the desire for pain-free way out of this morass. I doesn’t exist. The sooner we demand action to break-up and clean-up our financial system, the sooner we can regain a course of sound growth and prosperity.
@bear_in_mind;
I think I kind of sort of said that if you read past the first two sentences ;-)
Point was that even if we had gone Swedish (as we should have) there would have been a lot of pain to others than the banksters on Wall Street. Public pension funds comes to mind. The issue was mostly what innocent people should suffer exactly how much and in what way for the disaster of the Greenspan/BushII deregulation experiment.
I have heard a lot of people say things similar to your last sentence about how we just have to burn down the old rotten house and then a new one will “sprout up”. I have yet to see any real data to support that taking down the old banks would somehow help grow the economy. Our problem is not a lack of capital for good projects, it is a lack of good projects. Does it really make a difference whether it is the old insolvent or some new solvent banks that cannot find good project to finance?
couldnt agree more pantmaker
and the real choice was
ON THE DARKSIDE Say $1.5 trillion for the bondholders, a huge continuing interest service for them. And no accounting financial reform oversight of their opaque fixed income
VS IN THE SUNSHINE 1.5 trillion tax cuts or spending, lower interest service, transparent accounting as part of reformed financial system
what part of darkside for a bondholder not to like?
not to mention near deflation the bondholders dream
when i go give reform talks with fund and and investment managers in the audience
i warn the organizers i am going to rip them all new ones.
what we have is the misbegotten spawn of bankers and bondholders
with politicians supplying the lubricant
Don’t confuse the FASB with companies issuing fraudulent financial statements.
FAS 157 was issued in 2006, well before the financial crisis. It significatly INCREASED disclosures and required everyone to use the same definition of “fair value.” These are good things. The first paragraph on the statement says, “this Statement does not require any new fair value measurements.” FAS 157 merely says you must tell the reader how you determined fair value. That’s it.
If good market data does not exist, FAS 175 allows you to use a model to determine fair value (i.e. discounted cash flows). If bankers are ignoring relevant active market data and dreaming up models not based in reality, that’s fraud, which is a violation of FAS 157.
It’s not realistic for ALL assets to be written-down to the level of the most recent sale. A cash flowing asset is not worthless just because the market is disfunctional. FAS 157 doesn’t address what those models look like, but only that reasonable people are allowed to use reasonable models when there isn’t reliable market data available. If companies are not following FAS 157, your issue should be with the SEC, not the FASB.
If we had used mark-to-recent-fire-sale models for everything, we would have seen massive write-downs on even the most stable, profitable businesses followed by immediate, massive write-ups as the markets began functioning again. Not all businesses function like mutual funds, and its silly to suggest the accounting community should be forced to mark every asset to “market” on a daily basis, even if a true market does not exist.
You can argue about where FAS 157 should draw lines between a functioning and disfunctioning market, but blindly demanding that ALL assets to be marked to the most recent sales price is hardly the answer.
Point fingers at the banks if they don’t follow the rules, point them at the SEC if they don’t inforce the rules, but go easy on FAS 157.
[...] FASB Sold Out; Expected Results Followed (The big picture) : »This sort of accounting fuckery would never be tolerated in a nation [...]
Indeed. Keep at it, BR. I’d say you are “doing God’s work” but I’m one of those “secular leftists” (more secular than left) cited by Newt yesterday. Mark to market is one thing. Mark to magic is another thing.
@UncleMilty — the problem is that the model being used in this mark to model is also an extreme or “unreasonable” one, based as it is on credit bubble fueled valuations.
@bulfinch – I agree that the models are tricky, but FAS 157 does not specify what model to use. It simply says you should use the one that best approximates fair value. We all agree on that, don’t we?
The problem is in the execution and it’s not nearly as easy as everyone here makes it out to be. The world was on fire and “fair value” was changing on a daily basis and everyone had a different view. Even in retrospect, no one really agrees on what the value was three years ago. FAS 157 gave structure to the process and required more transparent disclosures.
Many on this blog are advocating for an absolute adherence to a last-trade model in EVERY SITUATION, but that model has flaws too. It would have led to huge write-ups just before the crisis.
Be careful what you wish for. Also be careful about criticzing FAS 157 when a simple reading of the standard would show that FAS 157 is not the issue. Fraudulent application of FAS 157 is the problem. If you know of specific cases of specific securities being valued fraudulently, than tell us. But a FAS 157 witch-hunt does not further the cause.
gd points uncle milty- esp about marking that fully reflected a bubble-this is a full marking prob?
however.
anybody right now can find a way to realize gains if they want
–most— particularly if they want to bonus half–can and do find a way
But even a bubble price is what you can liquidate for.
overall i would prefer to recognise even values that might be bubble… if realizable.
and raise reserves take other steps to acknowlege it would go away fast in a bust–but dont have an answer still thinking?
among other steps refuse or cut back as collateral
and of course marking a 13/1 levered balance sheet–meaning banks– would produce mr toads wild ride on quarterly earnings.
can someone explain why that is a bad thing?
it would properly scare the funders of of these behemoths who are otherwise counting on bailout.
also applying VAR to unmarked accounts is a complete joke
and annihilates the only purpose of VAR?
Barry,
You have the narrative wrong on this one, I’m afraid. FASB 157 was passed in Nov 2007 which was before Bear Sterns, the 2008 meltdown, etc. Having following this at the time, the FASB was getting pressure to pass this because firms did not feel that were being able to recognize their GAINS during 2005-2007 fast enough. During that period, the market value of investments was typically higher than the book or amortized value that some companies were required to hold investments at. However, when the economic/financial crisis turned the market on it’s head and caused companies to start recognizing substantial losses on their investments, the Emergency Economic Stabilization Act of 2008 passed in Oct 2008 allowed the FASB to basically suspend mark-to-market accounting as required FASB 157 due to the general illiquidity of the market that prevented the discovery of a fair market value price on a number of investements. The effective suspension of FASB 157 is what actually gave companies the increased flexibility to mark-to-model types of valuations.
In short, they did not sell out necessarily because of the introduction of FASB 157 but did sell out in suspending key provisions of it during the financial crisis.
Wayne