The Journal is good today in showing how the proposed new rule gutting mark-to-market accounting would be counterproductive to healing the banking industry—but not as good as it could be or as it would have been pre-Murdoch.
Mark-to-market means adjusting how much an asset is valued on your books, on a quarterly basis, by what it’s currently going for in the market. Before that rule, banks could value them based on their own models, which—no surprise—tended to overestimated their value.
The Financial Accounting Standards Board now wants to give banks the leeway to use “significant judgment” to value assets on their books. That would let them avoid marking down the value of their assets to their market prices if the banks say they plan to hold them until maturity. This idea is all kinds of bad.
As Bloomberg noted a couple of days ago, this rule could increase paper profits of banks like Citigroup by 20 percent overnight. That’s not real money—that’s accounting “money.”
The Journal is good to point out that this rule change will have the perverse effect of further damaging the banking system by giving banks the incentive and excuse to hold these bad assets on their books in perpetuity to avoid taking writedowns that would expose them as insolvent or force them to raise capital at expensive prices.
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.
This is, of course, the exact opposite direction things should go, and the exact opposite of what we’re spending hundreds of billions of dollars trying to do with the TALF.
“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.”
Willens is being euphemistic to a fault there.
And here we get into the problems—yes, again—of the short-form Journal story, arbitrarily stunted by a mandate to limit jumps.
This story gets 369 words on C1. That leaves it no room to give any context about, say, Japan’s lost decade and the striking parallels this rule has with the causes of that—a failure to deal with toxic assets, instead shuffling the day of reckoning down the road, and undermining confidence in the whole system.
It doesn’t get to point out that investors would be further than ever from knowing exactly what’s on these banks’ books and how much they’re really worth. It doesn’t point out that FASB is a private entity, not a government regulator or that it had come under withering pressure from Congress to change the rule. There’s no room for a broadening paragraph.
But, you know, good on the Journal for packing what it could into 369 words. God forbid somebody might have to turn to the jump on an important story like this.
Which effectively they do, if you count the separate piece in the Heard on the Street column some seventeen pages later. If they read it, they’ll find some of the info missing from the news story. And lucky for those who read both, the Heard has the right take on the issue:
The banks’ claims are largely bogus — after all, no accounting rule forced them to create and invest in the toxic securities that helped cause this crisis. But the Financial Accounting Standards Board is being pressured to water down the rule.
Even reading both, we don’t get a well-rounded view of the issue. That might force readers to read 1,000 words and turn a page.
UPDATE:
I missed this Floyd Norris piece on the bottom left corner of Business Day today. About the same topic and comes to similar conclusions.
Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR’s business section. If you see notable business journalism, give him a heads-up at rc2538@columbia.edu. Follow him on Twitter at @ryanchittum.