First United Chairman Blasts FASB
In a recent letter to shareholders filed with the Security and Exchange Commission (SEC), First United Chairman and CEO William B. Grant addressed the company’s “first annual loss in memory” of $12.8 million. 2009 was the bank’s worst showing in 75 years.
Grant recognized expanded lending in hospitality, insurance and other sectors new to the bank’s portfolio as well as ill-advised real estate investments as the primary culprits. He noted that most of the losses came from “trust-preferred securities” in banks and insurance companies that defaulted on or deferred their obligations.
But he also blasted the “controversial accounting guidance” of the Financial Accounting Standings Board (FASB), taking special aim at mark-to-market accounting. He felt its requirement to recognize the hypothetical losses of potential assets provided an unfair “challenge” to First United and other institutions.
If everything was mark-to-market, you really couldn’t run the bank at anything else than a quarter-to-quarter basis. Short-term loans and short-term liabilities are the only way to ‘manage’ mark-to-market.
FASB Fights to Restore Mark to Market
J.P Morgan Chase, Bank of America, Citigroup and Wells Fargo are aligned in opposition to the Federal Accounting Standards Board (FASB) proposal. Approximately $2.8 trillion of their loans could be affected, or about 40 percent of their total assets. The impact would be even greater on smaller banks that keep more of their assets in loans that aren’t marked to market.
Pressure for the change is coming from Congress’s belief that the FASB watered down mark-to-market rules and these loose rules contributed to the financial crisis. Banks were not required to pay sufficient attention to market value in the time leading up to the crisis, estimated losses were inadequate, and banks were unprepared for the credit crunch.
On the other hand, many bankers and bank regulators believe the rules exacerbated the crisis by causing the value of some loans to fall excessively.
Under the FASB proposals, banks would show loans at historical cost and then adjust them for both loan-loss reserves and market values so investors could see the gap between what management has held for losses and what investors may believe the loans are actually worth.
The second proposal would require banks to divide holdings between those they trade and those they hold. Tradable assets would affect profit immediately. Non-trading assets would also be marked to market but would be categorized as shareholder equity called, “comprehensive income.” Mark-to-market is pro-cyclical. It should be used on liquid, available for sale assets only, and marked to their “economic” value, not “market” value.
FASB to Propose Banks Expand Use of Mark-to-Market
Bill Isaac, former FDIC Chairman, weighs in on the most recent discussions about FASB applying mark-to-market accounting to LOANS. “We should be frightened to death that the FASB might just do what it’s saying it’s going to do.”
Update from FASB
Click on the link below for a summary update directly from the FASB on where they are at with regard to their changes on the subject of accounting for financial instruments . . .
FASB Technical Plan and Project Updates – FASB.org, March 10, 2010
Checks On IASB Called For
As of next year, the International Accounting Standards Board will assume considerably more influence when its rules form the basis for a single set of global standards.
To balance this increase in power, the G20 has called for the creation of an independent monitoring body. This was necessary, said David Wright, deputy head at the EU’s European Commission internal market unit, to “depoliticize” accounting standard setters.
This follows from the G20’s agreement last September that mark-to-market rules needed to be resolutely and quickly reformed – although the aggressiveness of this stance alarmed certain parties.
“Full respect to due process is a must,” said Fernando Restoy, chairman of the Committee of European Securities Regulators and quoted by Reuters. ”The monitoring board is a very big step forward but there is room to think a bit more about the right governance structure.”
Critics in the US and worldwide blame market-to-market rules for amplifying the impact of the credit crunch by forcing banks to price assets at depressed prices, triggering fire sales to replenish capital. These rules were subsequently eased by in the US by the Financial Accounting Standards Board in April 2009.
Accountants, Washington Helping Banks Fluff Profits
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.
That Wacky Leap of Faith
The Financial Accounting Standards Board (FASB) at long last eased the rule for valuing depressed long-term assets banks carry on their books.
Now bankers can declare that they’ll hang on to an asset until its value recovers. No longer will they be forced to value it at what it would sell for today on a sometimes nonexistent market.
Nonetheless the debate rages. The crux of the problem rests on whether you can trust the bankers. Some say no. Others say you need to take the leap of faith.
Putting a discussion of human nature and greed aside, rest easy. We can take the bankers at their word. As tempting as inflating the value of long-term assets in the short term may be, the FASB ensured that how banks value these asset will be on balance sheets for the whole world to see. In the current climate the number of bankers willing to defend a bogus valuation to the investment community is few and far between indeed. Besides, we really don’t have a choice.
It’s working
NRG Energy, a wholesale power generation company reported a sharp rise in first-quarter profit. Why? FAS 157.
Their tripling of net income was due to $271 million in unrealized mark-to-market gains for the first-quarter compared with $160 million in unrealized mark-to-market losses in the comparable quarter last year. Let’s do the math. A $431 million swing. Because of a change in accounting rules.
But the real good news? Income rose to $0.70 per weighted average common share, from $ $0.12 in the year-ago quarter.
The corporation wins. Employees have greater confidence that their jobs are secure. Investors are pleased. And Wall Street smiles. Everyone is happy.
Not through any largess from the FASB. Rather because a wrong was righted. NRG was able to value their long-term assets at a fair price instead of forcing them to pretend that their value is only what they could maybe sell them for today… in a down or nonexistent market.
FASB Staff Positions
The new FASB positions on impairment and fair value have been released.
- FASB Staff Positions – No. FAS-157-4
- FASB Staff Positions – No. FAS-107-1 & APB-28-1
- FASB Staff Positions – No. FAS-115-2 & FAS-124-22
FASB Modifies MTM!
FASB met this morning as Bloomberg reported in FASB Eases Fair-Value Rules Amid Lawmaker Pressure. Of interest is the new OTTI guidance added a provision that would allow financial institutons that previously recorded an OTTI charge to reclassify the non-credit portion of the charge from retained interest to other comprehensive income. This directly increases Tier 1 Capital. This was not in the FSP but we asked for it in our comment letter along with many others.
For example, the FHLB Atlanta which took a 87 million dollar charge for a 44,000 credit loss will now be able to reclassify 86.56 million into capital (unless credit losses have increased since then).
