Saturday, July 18, 2009
Bank Accounting May Get Worse
"Tucked into the Treasury Department's proposed regulatory overhaul is a push for banks to salt away more money for losses when times are good. ... For more than a decade, banks have been restricted by accounting standards and the [SEC] from building capital reserves for loan losses that are likely to occur, but difficult to predict. 'Banks felt under pressure to keep reserves thin,' said Eugene Ludwig, the former comptroller of the currency who now heads consulting firm Promontory Financial Group LLC. ... The reserves they set aside during good times didn't cover their losses during the financial crisis, and banks had to scramble for capital. ... 'We recommend that the accounting standard setters improve accounting standards for loan-loss provisioning by the end of 2009,' the Treasury said in the financial-overhaul plan. ... Many bankers disapprove of the current rules. JPMorgan Chase & Co. Chairman and Chief Executive James Dimon wrote in the bank's annual report, 'I find it absurd that loan-loss reserves tend to be at their lowest point precisely when things are about to get worse.' Bank of America Corp. CEO Kenneth Lewis said bankers 'ought to have maximum flexibility to allow for the judgment of management, provided, of course, everything is transparent to the investor'," my emphasis, Matthias Rieker at the WSJ, 23 June 2009, link: http://online.wsj.com/article/SB124569316530037889.html
That's it boys. Let's return to pre-SFAS 5 accounting and contingency reserves. Bank accounting stinks and if the bank-controlled Treasury has its way, will get worse. This is stupid. Accounting reserves are not capital. They are accounting entries! Dimon and Lewis are saying banks are bad at estimating loan losses. This is news? What does Timmy Boy Geithner consider an "improve[d] accounting standard"? My guess: letting banks report any numbers they want. Dimon's statement is beautiful, when else would loan loss reserves be lowest if not when things look best? Has Dimon any concept of a business cycle? For decades I believed bankers our second dumbest group of businessmen after insurance executives. I still do. "Maximum flexibility" means "we want the Big 87654 to be even more supine than they have been in the past. We want to report whatever we want and never get indicted for securities fraud".