Wednesday, January 6, 2010

More Bank Accounting Flexibility

"Facing political pressures to abandon 'fair value' accounting for banks, the chairman of the board that sets American accounting standards will call Tuesday for the 'decoupling' of bank capital rules from normal accounting standards. His proposal would encourage bank regulators to make adjustments as they determine whether banks have adequate capital while still allowing investors to see the current fair value--often the market value--of bank loans and other assets. ... 'Handcuffing regulators to GAAP or distorting GAAP to always fit the needs of regulators is inconsistent with the different purposes of financial reporting and prudential regulation,' Mr. [Robert] Herz said in a prepared text. 'Regulators should have the authority and appropriate flexibility they need to effectively regulate the banking system,' he added. 'And conversely, in instances in which the needs of regulators deviate from the informational requirements of investors, the reporting to investors should not be subordinated to the needs of regulators. ... Mr. Herz said that Congress, after the [S&L] crisis, had required bank regulators in 1991 to use GAAP as the basis for capital rules, but said the regulators could depart from such rules", my emphasis, Floyd Norris at the NYT, 8 December 2009, link:

The banks want "flexibility" to conceal insolvency. I'll say it: the PCAOB and Big 87654 either aid and abet securities fraud or are so incompetent they should be sent back to Accounting 101. These cowards sit and do nothing while insolvent entities like Citibank march on consuming public funds. Bank "regulators" conceal what they want. But the BIG 87654! I'm shocked. Like Captain Renault in "Casablanca", 1942, "Round up the usual suspects". That's it PCAOB, put obscure CPA firms out of business which audit less than $1 billion of client market cap. The appropriate response Herz was, "You regulators do what you want. But the FASB will not help you conceal what you are doing".


Anonymous said...

Auditors should oversee the reporting of facts and regulators should ensure that investors are protected and the financial system is stable.

If the Federal Reserve and other regulators allow a shadow banking system then we will never have stability.

Bernanke is the most complicit in this because he uses the shadow banking system as his prime means of executing monetary policy.

The idea that the FedRes should be the "systemic regulator" is laughable because they have already been doing that and failed miserably.

They are the prime regulator of bank holding companies. And they get plenty of info from the OCC/
Treasury on the banking system.

Through the primary dealers the FedRes looks into all the hedge funds and knows what they are doing.

Since they are the only axe in the MBS market they, in essence, are regulating that space (a giant one). And other parts of the securitization markets too.

The money market funds wouldn't play on repos... but they just play straightforward yield games... nothing fancy...

The FedRes knows what other central banks and sovereign wealth funds are doing...

Now if bank accounting was "true" investors could help "stabilize" the system. But the multiple levels of smoke have given investors tremendous arbitrage opportunities... which they have taken over and over again...

Anonymous said...

What would happen if GAAP says that an institution is insolvent while the "regulators" say it isn't? Would the bank go on reporting liabilities in excess of assets in their financials?

Independent Accountant said...

Before the Big 87654 firm auditing the bank would "rat it out", it would call the OCC or OTS and say, "Boss, what do we do now"? Then after being told, "close your eyes to the obvious", opine on whatever it was told to opine on.


Anonymous said...

This whole discussion doesn't correspond to what I was taught in public schools. Therefore it must be wrong...moving along, I see nothing here.

Good Day,
Tongue In Cheek

Anonymous said...

nice post. thanks.