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Advanced Accounting Philosophy: Americans, Europeans Differ on the Existential Question of Bank LossesBy Jon Shazar
Subject: FASB Comment Letters spreading around Firm
As you know the FASB has exposure drafts out that introduce the notion that banks should write down all their loans to fair value every quarter (remember the recession) and the comment letters are trickling in. A couple of them are classic. For your reading pleasure… Who knew writing a comment letter required technical savvy. Let’s tell the accounting gods in CT what we really think…
FASB doesn’t do its rule making in a vacuum. It solicits (and mostly ignores) comments from a wide range of stakeholders. The result is a rich set of data to examine the role of large institutions in shaping the rules that govern them. The result is language like this:
We believe that certain aspects of the proposed FSP fail to meet the Board’s objective and would, in fact, increase the difficulties experienced by preparers and auditors by limiting the number of data points that preparers may consider in making valuation estimates. In addition, we are concerned that the example provided in the proposed FSP is confusing and may lead to conclusions that are not consistent with the concepts and framework of Statement 157, further resulting in significant inconsistencies in the fair value measurements estimates for the same financial instruments among various preparers.
Which should properly be read as “This fucking mark to market stuff is killing us!”
Deutsche Bank Letter To FASB, March 27, 2009.
SIMFA Letter To FASB, March 27, 2009.
Citi Letter To FASB, March 30, 2009.
Agreeing that it would be much better if financial firms could just decide for themselves what difficult to value items on their balance sheet are worth if the price for similar assets in the market isn’t satisfactory to them, FASB voted to grant Imaginationland powers to anyone with a balance sheet.
The changes to so-called mark-to-market accounting allow companies to use “significant” judgment when gauging the price of some investments on their books, including mortgage-backed securities. Analysts say the measure may reduce banks’ writedowns and boost their first-quarter net income by 20 percent or more. FASB voted on the rules at a meeting today in Norwalk, Connecticut.
House Financial Services Committee members pressed FASB Chairman Robert Herz at a March 12 hearing to revise fair-value, which requires banks to mark assets each quarter to reflect market prices, saying the rule unfairly punished financial companies. FASB’s proposals, made four days later, spurred criticism from investor advocates and accounting-industry groups, which say fair-value forces companies to disclose their true financial health.
“I’m not sure how this system is going to survive if we cannot make up marks,” commented an anonymous (and probably imaginary) FASB representative. (At least she looked like she was from FASB, she was wearing a FASB T-Shirt). Asked what relation to reality the marks bore she commented, “What is reality anyhow? Are you really here? Am I? How do you know your senses are not fooling you? What is the matrix? You have to realize not that the mark can be bent, but that there is no mark.” Asked how FASB justified the vote she responded with “What is FASB really but a mental construct?” She begged off any other questions insisting that she had to catch a late double feature of Yellow Submarine and Heavy Metal.
FASB Eases Fair-Value Rules Amid Lawmaker Pressure [Bloomberg]
A review of “fair value” accounting promises to be a long, painful procedure that not only carries with it the possibility of severe and potentially deadly infection, but entails a long recovery time and is likely to reveal any number of other tumors and growths that threaten to be a bigger deal than the original concern.
Accounting pathologists that we are, our attention has been rapt.
Take a seat in the visitors observation lounge. We’re going in.
Auction-Rate Market Winners And Losers
By John Carney
As Credit Market Woes And Accounting Changes Drove Buyers Away, Some Firms Got Stuck Holding The Bag
Earlier this morning we discussed how changes in the way accounting rules treated auction-rate securities helped drive corporate investors out of the market. (For a rousing debate of exactly which accounting changes stamped out demand, click here.) Credit market concerns and the changes in the way auction-rate securities are treated on cash flow statements contributed to the rush out of the securities by bringing additional scrutiny to the once obscure financial instruments. At the end of 2007, many companies made the decision to shift assets out of auction rate securities as these changes were implemented for the new fiscal year.
The Apollo Group owned as much as $365 million in ARS at the end of 2007, according to a recent filing. But by February 19, 2008, all but $107 million of the ARS investments had been liquidated and not reinvested in the ARS market. Apollo says this well-timed exit was part of a plan to intentionally reduce its exposure to the auction rate securities, although they do not reveal what prompted the exit. The timing wasn’t perfect, however, and Apollo found itself unable to liquidate approximately $79 million in ARS due to auction failures.
Despite not completely exiting the ARS market, we’ll count Apollo a winner. So who’s still holding the securities? After the jump, we reveal two companies trapped by the auction failures.