Changed Accounting Rules Only Prolong the Pain
By Peter Atwater Apr 01, 2009 9:40 am
Shockingly, bad news doesn't get better with age.
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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2009-04-01 08:13:03
You couldn't be more wrong with your conclusions
You have to go all the way back to Jim Cramer's rant heard round the world to understand this concept. The whole idea behind Cramer's rant was for the Fed to slash interest rates all the way down to 1% or less back in August of '07. The reason for this was so the banks would have 6-12 months or longer to build up a huge cash cushion to handle the upcoming write downs. Unfortunately the Fed waited a year before getting the rates down to where they are now and that of course meant the banks did not have the war chest of cash needed to take this problem head on. But, the concept of borrowing money for 0% and lending it out at a higher percentage rate thus allowing the banks to make huge profits is still sound. All the financial industry needs now is a slight change to the mark-to-market rules to allow them to stay in business long enough to reap the profits from borrowing at 0%. The changes to mark-to-market would not have been necessary if the Fed had slashed interest rates a year earlier than they did.
It still amazes me that so called professional analysts haven't been able to wrap their brains around this simple concept. Financial stocks will continue to go up from here and will never retest the lows.
It still amazes me that so called professional analysts haven't been able to wrap their brains around this simple concept. Financial stocks will continue to go up from here and will never retest the lows.
2009-04-01 10:49:25
The Govt is clearly Committed
... to making things worse -- not because they don't care but because they will be able to grab even more power.
We lose and lose.
We lose and lose.
2009-04-01 11:15:36
God forbid we let the free market liquidate bad debt. What are they even waiting for? We all know the debt bubble is gunna get nationalized whether we like it or not. Destroy the dollar and bring in the Amero already. Don't expect me to pay any taxes though. I'm taxed enough through fractional reserve money creation as it is.
2009-04-01 14:06:05
Straight talk and action needed
Great article
I have to agree with you. The "berries" simply do not want to recognize facts, or are protecting something. At first I thought it was just their rich friends (political contributors), but I am starting to think that pension funds and other entities are involved in a big way?
But facts are facts:
1. The debt bubble will deflate and nothing will inflate it again
2. The weak companies will eventually fail (therefore it is better to quickly "restructure" them now, rather than let them wander the earth as "zombie"
But these are hard choices, and 'berries" don't like to make them. At least Obama is getting an earful in Europe right now. But the Europeans are know for more straight talk, but less action. The Americans are know for more action but less straight talk.
How about a combined strategy?
Straight talk and action?
I have to agree with you. The "berries" simply do not want to recognize facts, or are protecting something. At first I thought it was just their rich friends (political contributors), but I am starting to think that pension funds and other entities are involved in a big way?
But facts are facts:
1. The debt bubble will deflate and nothing will inflate it again
2. The weak companies will eventually fail (therefore it is better to quickly "restructure" them now, rather than let them wander the earth as "zombie"
But these are hard choices, and 'berries" don't like to make them. At least Obama is getting an earful in Europe right now. But the Europeans are know for more straight talk, but less action. The Americans are know for more action but less straight talk.
How about a combined strategy?
Straight talk and action?
2009-04-01 14:20:55
Peak Baloney. America is tired of eating baloney
FYI,
I'm not down on America long-term.
But I think in recent years the "Berry" leaders have been producing huge quantities of "baloney" and selling it to the people. The whole economy was based on excess leverage and debt, and we stopped producing real things.
So my prediction is the crash of 08 marked the "peak baloney" point for America (at least for the next few decades). You could also say the "Berries" are trying to reflate the "baloney bubble", but they will not succeed at this either.
Another indication that we reached "peak baloney" is that now China and Russia are trying to challenge our monetary and political dominance. So either we give up the baloney and create a healthy economy, or suffer a continued decline in World influence.
I'm not down on America long-term.
But I think in recent years the "Berry" leaders have been producing huge quantities of "baloney" and selling it to the people. The whole economy was based on excess leverage and debt, and we stopped producing real things.
So my prediction is the crash of 08 marked the "peak baloney" point for America (at least for the next few decades). You could also say the "Berries" are trying to reflate the "baloney bubble", but they will not succeed at this either.
Another indication that we reached "peak baloney" is that now China and Russia are trying to challenge our monetary and political dominance. So either we give up the baloney and create a healthy economy, or suffer a continued decline in World influence.
2009-04-01 19:35:12
GIven Banks More Discretion TO Price Assets is Absurd
Given the incompetence and lack of transparency on the part of banks that contributed to the current problems in the first place, it is absurd to give banks more discretion to price their assets as they see fit by relaxing mark to market, Have we learned nothing?
2009-04-02 08:45:15
Let's get real
Has anyone really read what FAS 157-e actually does? It just clarifies the rules that were already on the books. Management discretion was already in the rules, but their lovely auditors would not defer to that without 'expressed' clarity.
Finally, I'm glad that you all feel that somehow mark-to-zero accounting is better than using discounted cash flow, which I thought use to be the basic premise of financial theory. But heh, if some guys holed up in a room in Washington really know how to value securities over Wall St., I'm sure they have the intellectual capacity to do so, much like the rest of Washington.
Finally, I'm glad that you all feel that somehow mark-to-zero accounting is better than using discounted cash flow, which I thought use to be the basic premise of financial theory. But heh, if some guys holed up in a room in Washington really know how to value securities over Wall St., I'm sure they have the intellectual capacity to do so, much like the rest of Washington.
2009-11-26 22:51:56
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