The Financial Accounting Standards Board changed the rules which have required banks to report their loan portfolio and mortgage-backed securities at market values, called mark-to-market accounting.  Details in the New York Times show the changes now will allow banks to use their internal management’s discretion to set the value of these hard-hit securities as if they existed in a “normal” market, called mark-to-management accounting. In practice, bank management can now create P&L statements which are nearer to black than red. This transfer to subjective valuations will bring stability to the financial section of the economy as they will be able to show a profit, albeit false, while retaining the toxic assets on their books. Robert H. Herz, the board’s chairman said he voted for the changes because improved disclosures under other rules will likely aid investors to make informed decisions about the value of the banks, but it was the politics of congress grilling him to let the banks set values on toxic assets as they see fit and sufficient to get the banks looking profitable quickly.

ft take: While the Financial Accounting Standards Board hails its rules change as “new,” what we are seeing is just a reinstatement of “old,” Enron-style book-cooking oversight.  Mark-to-Market pricing is what consumers pay and sellers of real estate have to live with when valuing their assets; we call them comparable sales to set prices by objective analysis. But, just as with the exotic financial instruments devised and disseminated as bellows to stoke profits on Wall Street, these accounting regulations allow banks and corporations to seek shelter from inconveniently-valued assets by getting the accounting standards oversight board to permit the use of a façade of accounting magic by the very banks that hold the next-to-worthless paper on their books.

The oversight board caved to banks and corporations under massive political pressure from members of congress, who we dare say saw the bright light of lobby money.  Banks have gotten their wish to manage the valuation of their toxic assets internally without influence from the market place of Darwinian consequences.  Thus, they have opened the flood gates for artificial mark-ups in the purported value (prices for which they could not get near to if floated on the open market) of their mortgage-backed securities.

Watch for a string of bank/corporation P&L net earnings/profits to increase in the next 12 months  They now can mark up their assets and declare a profit—even when the securities are low-priced junk. But they know how to COOK the book and market values to conjure Enron-style profits: creating earnings from asset values that do not exist.  Mirrors help, and the standards board just handed this trick to banks and corporations with zero public comment and input only from politicians, stockholders and management—all now looking good from the inside out;  but it will be another story as we all view this over the next year or two—from the outside looking in.

RE: “Banks Get New Leeway in Valuing Their Assets,” from The New York Times