Friday, April 03, 2009

531 Out of the Frying Pan?

531 Out of the Frying Pan?

The banks have a new present and it may be even better than the bailout.  An important change in the accounting rules, not from the government, but from the Financial Standards Accounting Board, which sometimes is one of those fox guarding the hen house operations and a trade association and a cop.  They have, under pressure from Congress gotten rid of a rule called "mark to market."

Mark to market means you have to figure out the value of your assets and include that on your balance sheet.  And these days, a lot of stuff is worth nothing and that doesn't look so hot on or near the bottom line.

The basic idea behind all this is that there exists an actual market, that people are buying and selling and not under duress.  And these days that's not true.  Or almost not true.  Would you buy a package of bundled mortgages?  

So, with mark gone, how do people value their assets?  Well, that's not exactly "transparent" to use the cliche of the moment.

One way is to estimate cash flow from the investments.  That's still a real figure.  Another way is to guess and then come up with some fancy figure-work to support the guess.

Critics say this is going to make it easier for banks and others to hide losses and make them look better than they are.  Others say it'll let them get the lending action going and that's what's needed now.   And, of course, it'll make it harder for your auditor to argue with you when you set a price.

Mark to market is also known in the trade as fair value accounting.  It's supposed to give you an objective look at a company's condition.  

Is this going to work?  Perhaps.  It'll stop the firestorm of distress sale write downs.  It will free up bucks, if, perhaps, only on paper.

On the other hand, this change is a change in only one of the gazillion moving parts that make up the world of finance.  And exactly how its ripple effect will play out is as well known as the "real" ripple effect when you throw a stone into a pool of standing water.  Round-ish patterns of tiny waves will be emitted from where the stone hits.  But how many, for how long and with what intensity is unknown.


Shrapnel:

--If a crook gets caught, and the charges go away, is he still a crook?  Dunno.  Ask Ted Stevens.

--A couple of judges in Pennsylvania have pleaded guilty to funneling low level juvenile criminals into a privately run jail in return for 2.something million dollars in bribes.  Let's hear it for the crooked judges.  At least they knew how to extract money from someone else, something today's banks have forgotten.

--Remember the good old days when the people we elected were honest?  A favorite was Nixon.  He said "...your President is not a crook."  And everyone believed him.


I'm Wes Richards.  My opinions are my own, but you're welcome to them.®
WJR 2009©

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