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Changed Accounting Rules Only Prolong the Pain

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Shockingly, bad news doesn't get better with age.

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Editor's Note: The following was posted in real time on our premium Buzz & Banter. It's being shared here for the benefit of the Minyanville community.

With the FASB Board having been "voluntold" to "fix" mark-to-market accounting, I have no doubt that, before the week is out, we will have changes to FAS 157, which will give corporations far greater latitude in the timing of losses on their investment securities, while protecting the accounting industry from greater liability.

But, as I offered yesterday, in my discussion of Fifth Third (FITB), changes in accounting rules can have unintended consequences. And while clearly the intent of the proposed change to mark-to-market accounting is to delay loss recognition -- with the hope that a looming economic recovery will save the day -- I, for one, believe that the more likely outcome is ultimately an industry of Japanese-style "zombie banks" and a significant lengthening of our economic malaise.

Put simply, for struggling economies like ours, bad news doesn't get better with age. And at every turn, it appears we're choosing to transform a very deep V-shaped recession into a much longer (and, I would offer, not that much less deep) U-shaped one. In a world of too much debt, I think it's critical to recognize that the length of a downturn is ultimately far more important than its depth, for it's that debt's carrying cost that's the silent killer.

With each passing day, fewer and fewer Americans have the financial staying power to survive this crisis - and unfortunately, I believe the accounting industry, clearly under pressure from the government, is about to make things worse.



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