Bernanke Defends Policies on Inflation, Mark-to-Market
the central bank’s purchasing of bonds to help aid the United States’ economic recovery. In a House Financial Services Committee hearing, Bernanke backed up his additional decision for “quantitative easing.” “What we’d like to see is a sustainable recovery. We don’t want to see the economy falling back into a double dip or to a stall-out,” he said.
Seeking Alpha writer Pater Tenebrarum recently shared an interview between Bernanke and Westwood Capital manager Dan Alpert at Bloomberg. In the interview, Alpert grills Bernanke on the nearly $3 trillion on mortgage loans that remain on the books of the United States banking industry. With many of these mortgages “under water,” Tenebrarum and others express concern that the suspension of mark-to-market rules in 2009 serves only as a patch until theseunderwater loans get better. Tenebrarum notes that this is the same strategy used in the past two decades by Japan, which has produced the “well-known results of never-ending economic stagnation and a fiscal debt that has grown to the sky.”
Bernanke remains committed, however, to more than $600 billion in treasury purchases.
4th Quarter Earnings Almost Complete, Appear Strong
With 4th quarter financial reporting over 95% complete, reports appear to be strong from this earnings season. Zacks Investment Research has received reports from 479 firms and is awaiting the results from the straggling 5%. The investment research company noted that typically, the early-reporting firms perform much better than those filing reports last, but that the firms reported represent almost all of the potential earnings for 4th quarter. Thus, the remaining firms are not expected to have much of a negative effect on the overall earnings in 4th quarter.
Total net income has risen a very strong 29.6% versus the same quarter one year ago. Zacks points out that significant growth came from the financial sector, which posted huge net margins. The researchers did caution that the quality of the reports versus prior years can be subject to interpretation due to the absence of mark-to-market accounting. Much of the growth might be attributed to firms setting aside fewer reserves for bad debts compared to a year ago, said Zacks.
Incoming IASB Chief Says Accounting Rule Makers Must Modernize
At the opening remarks of the European Commission conference on financial reporting, incoming International Accounting Standards Board (IASB) chairman Hans Hoogervorst said that accounting rule-setters should strive to remain independent from business but remain sensitive to the community’s concerns. Hoogervorst, who succeeds Sir David Tweedie in June, said the IASB would review its governance structure to increase transparency. “It’s very important that we develop a governance structure that is more inclusive,” he told delegates at the conference in Brussels. “At all costs we should avoid the perception that IFRS (International Financial Reporting Standards) is dominated by a small group of nations.”
One critical issue facing the board is the topic of fair value accounting, which Hoogervorst discussed. Defending the controversial accounting principle, Hoogervorst said that firms who applied fair value rules “came out of the crisis a lot better than other firms,” because the were able to “get rid of poisonous assets at a much earlier stage.”
Carmichael: Convergence, Fair Value Are Most Important FASB Tasks
Douglas Carmichael, standing member and former chief auditor of the Public Company Accounting Oversight Board (PCAOB), recently spoke to Crain’s New York Business about the upcoming challenges facing the Financial Accounting Standards Board (FASB) and the accountancy profession in general.
Carmichael recognized the steps that the Sarbanes-Oxley Act had made in making auditors more diligent, moving the spotlight away from accountants in the most recent financial crisis – something that was not the case in the Enron and WorldCom scandals. He also spoke on the FASB’s current issue of juggling convergence with the International Accounting Standards Board (IASB), replacing former chairman Robert Herz, and tackling the most important and heated issue in recent history, the proposed expansion of fair value accounting.
Carmichael said of fair value accounting, “If you move too quickly and broadly into valuing assets at their fair market value, you risk sacrificing the reliability you get valuing them at historic cost.” Skeptical of the broad application of the rule, Carmichael continued, “Anything that makes tradeoffs between relevance and reliability concerning revenue recognition worries me. That’s because in the past, we’ve seen fraudulent reporting overwhelmingly due to misapplication of principles on revenue recognition.”
Carmichael was also cautionary of a rush towards IASB convergence. “My belief is the new FASB chairman should resist pressure for convergence too quickly and only make steps that result in high-quality accounting,” he said.
SEC Focuses on IASB Funding
Jim Kroeker, Chief Accountant of the U.S. Securities and Exchange Commission, says efforts are now focused on securing funding for the International Accounting Standards Board (IASB). The IASB writes the International Financial Reporting Standards (IFRS) that are used by more than 100 countries, which may soon include the U.S.
“A stable broad-based funding system with a diversity of capital market participants providing ‘no strings attached’ funding is of great importance to establishing a structurally sound international standards setter,” Mr. Kroeker said to an accounting conference at Baruch College in New York.
Mr. Kroeker’s comments come as political pressure on accounting rule-makers mounts worldwide. Last year, some in the European Union threatened to make their own changes to accounting rules if the IASB did not immediately adjust mark-to-market accounting rules.
The Horror, The Horror…
In case you haven’t heard, mark-to-market accounting is NOT completely dead. After the House Financial Services Committee leaned on the FASB to fix mark-to-market account in March of 2009 because it was unnecessarily destroying the capital of, in many cases, otherwise healthy financial institutions, the FASB acted quickly and changed the accounting guidance so that market values were still disclosed to investors but would not destroy their capital if they intended to hold investments longer than the duration of the fire sale. Now the FASB is making a push to go BACK to mark-to-market accounting! And this time it includes more than just investments. Read the article below for more details. The worst part of all of this is that not only will this impact a financial institution’s ability to implement their long-term business model of lending and investing, it will affect individuals’ and businesses’ ability to get loans!
Stop This Horror Before It Starts Again – Forbes Magazine, June 28, 2010
US GAAP and IFRS Convergence Moving Along
International Accounting Standards Board Chairman Sir David Tweedie told the council of the European Union that the effort to reconcile Generally Accepted Accounting Principles (U.S. GAAP) and International Financial Reporting Standards (IFRS) is advancing.
“Both the FASB and the IASB have agreed upon common principles to help us to achieve a common standard,” he said. “That is our objective. At the same time, the IASB is conscious of the strongly held view of investors and other stake-holders internationally that a combination of cost-based and fair-value accounting remains appropriate for financial instruments.”
Earlier this year, the U.S. Securities and Exchange Commission reaffirmed its commitment to make a decision in 2011 to adopt converged standards by 2015 or 2016.
“For nearly 30 years, the Commission has promoted a single set of high-quality globally accepted accounting standards, which would advance the dual goals of improving financial reporting within the U.S. and reducing country-by-country disparities in financial reporting,” SEC Chairman Mary L. Schapiro said in a statement. “But supporting this goal is only the beginning of the discussion, not the end.”
Limited Government Leads to Economic Growth
Mr. George Melloan retired in 2006 after a 54-year writing and editing career at The Wall Street Journal, where he was a key member of the Journal’s editorial-page staff during the 1970s. He has also written the book, The Great Money Binge, in which he makes the case that less regulation is needed to promote economic growth.
In The Great Money Binge, Mr. Melloan blames mark-to-market accounting rules required by the Financial Accounting Standards Board in 2007 for adding gasoline to the fire of the financial crisis.
Mr. Melloan says that requiring companies to adjust their books every time an asset changed value resulted in showing paper losses that had a cascading effect. Companies were forced to sell assets that they had intended to hold and thereby lowered prices further.
“Since uncertainty had locked up the market for [mortgage-backed securities], the mark-to-market rule exacerbated the problem. How do you mark something to market if there is no market?”
The Great Money Binge is published by Threshold Editions.
Make No Little Plans
The President’s Economic Recovery Advisory Board, headed by the venerable Paul Volcker who has seen his share of economic woes, is pushing to double exports as a percentage of GDP.
And we’d all like to be thinner, younger, and richer.
That’s not to say it can’t be done, but given that our policies over the last 30 years have all but outsourced our manufacturing sector and of hundreds of industries, about all that we have left to export are agricultural products and bulldozers.
The US was once the world’s leading manufacturer of near everything but chopsticks. We have traded that to be the world’s biggest shopping mall.
With that said, the goal is ambitious. To rebuild America’s manufacturing infrastructure implementing 21st century technology to effectively compete with clumsy labor-intensive manufacturing from the third world is exciting. This may be more than the Economic Recovery Advisory Board had in mind, but Americans have never been known for thinking small. As the oft-quoted architect Daniel Burnham once encouraged, “Make no little plans; they have no magic to stir men’s blood…Make big plans, aim high in hope and work.”
Why Go Back?
There were mark-to-market rules during the Great Depression. Franklin Roosevelt had the good sense to suspend them in 1938. For the next 70 years? No problems. Then in 2007 the Federal Accounting Standards Board (FASB), went back to those halcyon days of 1936 and brought back mark-to-market accounting and forced banks to take losses before they happen.
You can burn a lot of calories wondering why the FASB didn’t leave well enough alone.
After a virtual banking collapse, in April of this year the FASB re-suspended the rules. And surprise, banks are suddenly in better shape. What’s more, it didn’t cost any one a dime, taxpayers have probably saved billions in bailout funds, and there is widespread optimism that the economy is turning around.
And oh yeah. The investments the FASB wanted downgraded by mark-to-market? Using the same mark-to-market rules, they’re worth more, too.
So why does the FASB now want to go back yet again to an archaic rule that exacerbated the Great Depression and clearly made the Great Recession far worse than necessary?
We can only speculate. But it’s clear that more than a few FASB members are miffed that they look like they caved to political pressure. I agree that having Barney Frank and Paul Kanjorski in your kitchen isn’t fun, but do you really want to see banks and the economy crumble again?
