Comments on FASB’s fair value amendment reflect FAS 157 distress

Lenders have been hammered by the pathologically procyclical impact of FAS 157’s mark-to-market regime.  Hardly surprising, therefore, that banks and credit unions came out in force to support the latest FASB “clarification” of FAS 157.  Some other commenters, mostly from the “analyst” community, emphatically disagree.

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Barney Frank to FASB: Quit pretending to so much reality and certainty in fair value accounting!

Today, in congressional action sure to give every internal auditor and financial analyst recurring nightmares, members of the U.S. House Capital Markets Subcommittee demanded that the Financial Accounting Standards Board (FASB) demonstrate greater flexibility and speed in changing market-to-market (or “fair value”) accounting rules in the face of today’s financial industry crisis, or else. Much of the commentary came across as a congressional call for an IASB-like principles approach in place of the FASB’s detailed rules-based approach.

House Financial Services Committee Chair Barney Frank (D-Mass) and Capital Markets Subcommittee Chair Paul Kanjorski (D-Pa), each in his own way, stated that mark-to-market accounting must be applied differently to different companies and industries based on their respective circumstances that changed must happen now, not later after more “academic” study. In his opening statement, Kanjorski declared:
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Not so fast, Johnathan Weil: Citigroup & the fair value illusion

Johnathan Weil called on Citigroup today to “properly confess” the “rot on Citigroup’s $2.1 trillion balance sheet.”  Weil is sure the rot is there because if it weren’t Citigroup “wouldn’t have needed last week’s government rescue [including] a new $20 billion investment by the Treasury Department, plus a guarantee covering about $306 billion of the bank’s assets against most losses.” I beg to differ.

The “rot” may well be an illusion created by poorly-drafted accounting principles applied in draconian fashion by auditors spooked by the specter of ruinous lawsuits.  Citigroup’s request for government assistance may well be an appropriate strategic response to the illusion.  In the market place, a good illusion beats a bad reality most any day.

Weil assumes facts not in evidence and arguably misapplies SEC regulations in demanding the Citi book losses now.  Under SEC rules, Citigroup would be obligated to “confess” losses on Form 8-K only if Citi’s board concludes that a material charge for impairment is required under generally accepted accounting principles.  If the board either has concluded that such a charge is not required or has not yet concluded that one is, no Form 8-K confession is called for. Continue reading

Wachovia deal says “fair value” is higher when the government stays away

Great news just in from Wachovia: It’s “fair value” rose by an astonishing 750 percent overnight, to $15.1 billion from $2.16 billion. That’s right. Yesterday at this time, Wachovia was supposedly worth only $2.16 billion — in the eyes of government regulators who were trying to force it into an arranged marriage with Citigroup. Turns out that the regulators were wrong. The market had other ideas.

Congress take note: regulators can get it wrong on both ends — high and low. Lucky for Wachovia’s shareholders — and the financial markets — Wachovia’s board didn’t listen. Best to let the market do its work and get out of the way.

Speaking of which, what about U.S. GAAP’s “fair value” accounting regime? How much was Wachovia really worth 24 hours ago? Either U.S. GAAP was lying then or it’s lying now. What’s the point of having companies report assets at “fair value” when fair value is so context-dependent and fluctuates by 750% in a matter of hours? Fair value makes sense in some contexts, particularly in highly liquid markets. In others, it is likely to be materially misleading.

FASB 157 Update: JP Morgan defends mark-to-market accounting

Some commentators — including Lynn Turner — have pointed out that Section 132 of the bailout draft appears to be an effort by Congress to empower the SEC to immediately suspend mark-to-market accounting, bypassing normal due process rule making with an “order” that would not require public notice or comment. Continue reading