Academic

FASB v. Treasury

By Gordon Smith, Christine, Hurt, Vic Fleischer, Fred Tung, Lisa Fairfax, David Zaring

According to the WSJ, the Financial Accounting Standards Board (FASB) is changing its mark-to-market rules tomorrow, "allowing banks to set their own values for certain hard-to-value troubled mortgages, corporate loans and consumer loans...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."

The most alarming part of the article is the observation that there is a "disconnect" between this accounting change and the Treasury Plan for banks.  Both try to address the central problem of valuing so-called toxic assets legacy funds.  Everyone seems to believe that these assets are "really" worth more than they're selling for now, and therefore that anyone who sells now is losing money they don't have to, because at least some will increase in value.

What do we want banks to do?  Hunker down until the storm passes and the assets can be sold for more money than they can get now?  If so, and banks are hindered by an accounting rule that forces them to "mark" them down to an artificially low "market" price, then FASB's change of heart could help them eventually see more money.  But if we want banks to get rid of these assets, then Treasury's Public-Private Investment Fund (PPIF) could help banks.  But then PPIF investors and taxpayers would get the benefit from the expected up-tick in value.

I favor the PPIF idea, on the theory that relaxing mark-to-market gives banks an incentive to "wait it out," rather than deal with the central problem of valuation and facing up to losses.  Still, I'd hate to have sell anything--a house, a car, a teacher's manual--in this market.  Actually, if you're looking for that last one...

Kidding.

Full post as published by Conglomerate on April 01, 2009 (boomark / email).