In a Slate editorial response to Charles Lane’s “When Uncle Sam Plays Banker” piece in the Washington Post, Slate business and economics correspondent Matthew Yglesias says that the Congressional Budget Office’s (CBO) proposal to account for federal loan programs at fair value is misguided.
The CBO’s proposed budget, under fair value, would account for the cost of a federal loan program based on current market rates, taking greater account of default risks and other factors not currently used in federal lending.
Proponents of the fair value proposal suggest that using market prices will more accurately describe the true cost of some federal loan programs. Under this method, in an example used by Yglesias, the federal student loan program as it currently stands would cost the federal government billions of dollars, rather than the financial gain that’s booked under current accounting procedures.
But the problem, says Yglesias, is that the federal market should operate differently than the private market. “The interest rate on federal debt is a market price. It just happens to be the case that the market interest rate on federal government debt is lower than the market interest rate charged to private financial institutions,” he says.
Filed under: Congress, Fair Value, Fair Value Accounting, General
Paul Kanjorski (D-PA), chairman of a subcommittee of the House Financial Services Committee, came out strongly opposed to mark to market accounting in a March 2009 hearing he conducted. At that time he complained:
The magic of mark to market accounting required this relatively minor shortfall to be treated as an other-than-temporary-impairment loss of $87.3 million. I find that accounting result to be absurd. It fails to reflect economic reality. We must correct the rules to prevent such gross distortions.
In a recent press release announcing new hearings to assess accounting rules and a lack of transparency in financial reporting, Mr. Kanjorski appears to have modified his position:
“…We must ensure that accounting and auditing standards respond to the needs of investors by producing timely and accurate assessments of a company’s financial situation. This hearing will enable Congress to review the current accounting and auditing standards that apply to participants in our financial markets and discuss how we can improve them in the future.” (Emphasis added.)
I agree and disagree. Accounting should reflect the economics, not drive them. This isn’t either/or. Let’s report the fair value by informing investors in the footnotes.
Filed under: Congress, Fair Value, Fair Value Accounting, FASB, IASB, SEC
Senators Sharrod Brown (D-OH) and Edward Kaufman (D-DE) have offered an amendment to the Restoring American Financial Stability Act of 2010 that would essentially require the Securities and Exchange Commission (SEC), the Financial Accounting Standards Board (FASB) or both to establish a rule that publicly traded companies list all assets and liabilities on the balance sheet and that these be recorded at fair value.
Historically accounting standards have allowed off balance sheet financing via leases and repurchase agreements. It was recently learned that Lehman Brothers used repurchase accounting to remove liabilities from the balance sheet in a maneuver to increase leverage.
The amendment, if adopted and passed, would also present an obstacle to the effort to merge FASB ad IASB standards. The FASB prefers fair value basis, however the International Accounting Standards Board (IASB) is opposed.
The American Institute of Certified Public Accounts, the Center for Audit Quality, the Chartered Financial Analyst Institute, the Council of Institutional Investors, the Investment Company Institute, the Financial Executives International, and the U.S. Chamber of Commerce have objected to the Brown amendment. Their stated position, in part, is:
We believe political influences that dictate one particular outcome for an accounting standard without the benefit of a public due process that considers the views of investors and other stakeholders would have adverse impacts on investor confidence and the quality of financial reporting, which are of critical importance to the successful operation of the U.S. capital markets.
In his prepared statement to the Senate Permanent Subcommittee on Investigations, Chief Risk Officer of Goldman Sachs Craig Broderick explained how Goldman Sachs believes in a rigorous mark-to-market value assessment.
The central tenet is our daily discipline of marking all of the firm’s financial assets and liabilities to current market levels. We do so because we believe it is one of the most effective tools for assessing and managing risk, providing the most transparent and realistic insight into our risk positions and associated exposures. Goldman Sachs is one of the few financial institutions in the world that carries virtually all financial instruments held in its inventory at current market value, with any changes reflected immediately in our risk management systems.
Chief executive Lloyd C. Blankfein foreshadowed Broderick’s remarks in his own opening statement, “We believe that strong, conservative risk management is fundamental and helps define Goldman Sachs.”
During the contentious session, Mr Broderick credited Goldman’s risk management and mark-to-market accounting for minimizing its CDO losses in 2007-08.
This is an appropriate application of MTM. MTM for trading firms only. MTM disclosure for investors/banks/insurance. The accounting for investors should be different for traders and broker/dealers.
William Isaac, a former Federal Deposit Insurance Corp. chairman and now the chairman of LECG, expressed his objections to the Financial Regulatory Reform Bill now being debated in Congress. He is quoted in American Banker as saying that, among other omissions, “What’s wrong with these bills is they do not fix the regulatory system that led us into this problem…They don’t deal with the accounting at all. Mark-to-market accounting was a major contributor to this crisis.”
Other critics argue that rules governing banks have actually been softened by the changes in mark-to-market accounting. Banks are now free to “write-up” the values of assets that had few, if any, buyers.
Mr. Issac also notes that the bill does not deal with the Basel capital accords and the procyclical accounting for loan-loss reserves. Nor does the bill institute an independent watchdog to oversee the system.
What’s the rush? Let’s do it right. The economy seems to be getting better. Let’s find a solution that works, rather than one that is easy to pass through Congress now…remember the old saying, “Decide in haste, repent at leisure.”
Look for another rosy round of profits when banks turn in their numbers for the second quarter ending in June when it will be legal for them to improve their balance sheets by shifting losses into the future, thanks to new accounting rules passed by a one-vote margin by the Financial Accounting Standards Board (FASB).
It’s just one in a series of changes made to accounting rules that allow banks to shift or ignore losses or pretend that liabilities aren’t liabilities. The struggle for control of the financial recovery — where the money goes, how it’s counted and who survives — is nothing short of war. Truth has been the first casualty.
The latest rule change allows banks to split losses into ones that they recognize immediately and others that are pushed down the road and may pop up on the books later. It passed in April with barely any notice from the press. The accounting tricks allow banks, which may otherwise be deemed insolvent, to continue to operate. It’s a hell of a time to be an accountant.
CNBC Power Lunch Market Task Force reactions to the House Financial Securities Committee hearing on Wednesday, March 25 and US government plans to implement additional market regulations. The Committee was inquiring about credit availability in the US banking system, and whether current regulatory or accounting structures were inhibiting lending.
This article from CFO.com, Congress Members Fume at Fair Value, provides a clear summary of last week’s congressional hearing on fair-value accounting, emphasizing that Congressmen called for changes to mark-to-market rules, rather than an outright suspension of those rules. As most of us know by now, the meeting culminated in a promise from FASB to have some fair-value accounting rules guidance ready in three weeks. However, only time will tell whether this guidance will actually solve the issue or not. In the meantime, Representative Alan Grayson (D-FL) and FASB Chairman Robert Herz both believe that some institutions are waiting to write down damaging assets until potentially beneficial rule changes are enacted.
This WSJ article on the FHLB provides a solid real-world example of how mark-to-market accounting has drastically affected banks. In the fourth quarter, the FHLB recorded a combined loss of $672 million-their first loss in about 20 years. This loss resulted from massive write-downs on mortgage securities that some home-loan banks had picked up in recent years in hopes of attaining higher yields.
Further obstacles may await home-loan banks with regards to their main business, which is making loans, or advances, to the commercial banks, credit unions, insurers, and thrifts that make up the home-loan banks’ membership. Banks’ demand for advances has gone down after receiving direct financial aid from the government, and this demand may decrease still further if the FDIC enacts a planned rule change that would require institutions with high dependence on advances to pay higher fees. Considering these complications, it seems further challenges are in store for home-loan banks.
Read this article that was in the WSJ yesterday: Mortagage Securities Drag FHLB to a Loss.
Former Dallas Fed Governor Robert McTeer’s testimony to the Financial Services Subcommittee on mark-to-market accounting: