Jonathan Weil over at Bloomberg finds a great way to illustrate the see-no-evil-hear-no-evil policy being instituted by the accounting-standards board FASB to make banks look healthier.

Charles Bowsher, who chaired the Federal Home Loan Bank System’s Office of Finance, quit rather than sign off on financial statements he suspected weren’t accurate. Why weren’t they accurate? They use tactics similar to what FASB is about to institute on mark-to-market accounting—namely, you don’t have to price assets on your books according to what they’re worth on the market, you price them according to what you think they’re worth. That’s known as “mark-to-management”—an epithet used by FASB’s own chairman even, before Congress lit into him last month.

Here’s an example of what Bowsher is upset about:

For the fourth quarter of 2008, the FHLBanks said their total preliminary net loss was $672 million. It would have been many times larger, had they included all their red ink.

The year-end balance sheet at the FHLBank of Seattle, for example, showed $5.6 billion of non-government mortgage-backed securities that it says it will hold until maturity. Yet the estimated value of those securities was just $3.6 billion. The bank, which reported a $199.4 million net loss for 2008, said the declines were only temporary. They’ve been anything but fleeting, though. Most of those securities have been worth less than they cost for more than a year.

Here’s Weil’s context on FASB’s new decision (emphasis mine):

The FASB’s rules on this subject, which have never been well defined, are now in flux. Today, after caving in to pressure by the banking industry and members of Congress, the Financial Accounting Standards Board is set to vote on a plan to relax its rules on mark-to-market accounting, so that companies can disregard market prices and ignore losses on their securities indefinitely.

While that wouldn’t make the banks any healthier, it would make their numbers look prettier. The FHLBanks have been among the most vocal lobbyists pressing for the change.

I like also that Weil catches the Office of Finance spokesman misleading him about what it knew on why Bowsher quit and makes sure to print the guy’s name.

The finance office didn’t say why Bowsher was quitting, when it issued its March 24 press release announcing his resignation. On March 30, a spokesman, Michael Ciota, told me the people who work there didn’t know, including its chief executive, John Fisk. “We’re not aware of any reason,” Ciota said. “There’s not a whole lot to tell.”

After I told Ciota yesterday about Bowsher’s comments to me, Fisk called me back. He confirmed that “Mr. Bowsher has expressed his concerns to me around the complexity of valuing mortgage-backed securities and the process of producing combined financial statements from the 12 home loan banks.” He added: “I don’t think it’s appropriate for us to speak for Mr. Bowsher.”

And that he points out Bowsher as a sort of hero of the financial crisis, something all too lacking right now.

Tough stands are nothing new to Bowsher. As comptroller general, he was in charge of the General Accountability Office, the investigative arm of Congress. At his direction, the GAO was among the first to warn the public about the brewing savings-and- loan crisis during the 1980s. He testified before Congress in 1994 that there was an “immediate need” for “federal regulation of the safety and soundness” of all major U.S. derivatives dealers. (How’s that for prescient?)…

Now the question for taxpayers is this: If Charles Bowsher can’t get comfortable with these banks’ financial statements, why should anybody else be?

Somebody ought to give this guy a medal.

I think the press is rising to the occasion on this mark-to-market stuff. It’s doing the best it can to point out the dangers of it. It’s up to policymakers now to do something about it.

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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.