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FT.com | Willem Buiter's Maverecon | How the FASB aids and abets obfuscation by wonky zombie banks

The Financial Accounting Standards Board (FASB), at its meeting on April 2,  has once again relaxed mark-to-market accounting rules. This occurred after the House Financial Services Committee, a wholly owned subsidiary of the American Bankers Association, had, at hearings on March 12, 2009, effectively ordered the FASB to revise its guidance on fair value in inactive markets.  The HFSC used the threat that, if the FASB were not sufficiently accommodating, Congress would legislate on the matter off its own bat to give the zombie banks what they wanted.
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Basically, the new guidance allows banks to shift a whole load of toxic and impaired securities from level 2 to level 3.  Up till now, a frequent source of level 2 information were prices achieved by competitors' asset sales to help determine the fair-market value of similar securities they hold on their own books. Banks are now allowed to ignore prices achieved in competitors'  asset sales when these transactions aren't "orderly".  This includes transactions in which the seller is near bankruptcy or needed to sell the asset to comply with regulatory requirements.  This is vague and broad enough to drive a coach and horses through fair-value accounting for most imperfectly liquid assets.



"Dieu se rit des hommes qui se plaignent des conséquences alors qu'ils en chérissent les causes" Jacques-Bénigne Bossuet
by Melanchthon on Fri Apr 3rd, 2009 at 09:26:32 AM EST
[ Parent ]
Melanchthon:
Basically, the new guidance allows banks to shift a whole load of toxic and impaired securities from level 2 to level 3.  Up till now, a frequent source of level 2 information were prices achieved by competitors' asset sales to help determine the fair-market value of similar securities they hold on their own books. Banks are now allowed to ignore prices achieved in competitors'  asset sales when these transactions aren't "orderly".  This includes transactions in which the seller is near bankruptcy or needed to sell the asset to comply with regulatory requirements.  This is vague and broad enough to drive a coach and horses through fair-value accounting for most imperfectly liquid assets.
This appears sensible. However, it would potentially allow people to ignore a lasting drop in stock prices caused by "unwinding" of positions by a hedge fund in distress, which is nonsense.

Most economists teach a theoretical framework that has been shown to be fundamentally useless. -- James K. Galbraith
by Carrie (migeru at eurotrib dot com) on Fri Apr 3rd, 2009 at 09:29:07 AM EST
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