Friday, 17 April 2009

Of Baseball Cards and Bad Assets

Check out Mike over at Rortybomb; he's got a good post on the accounting method known as mark-to-market. The principle is simple (and makes sense to me): You value an asset on your books (your bicycle, your Jim Rice rookie baseball card, your synthetic CDO) for what the market is willing to pay. None of this whining that, "Well, my Jim Rice card IS worth $85; it's just that the damn paper mill closed last summer and everyone's worried about their jobs, so there's a shortage of liquidity among baseball card buyers right now." Or the banking industry version: "Well, my synthetic CDO IS worth $85 million; it's just that the damn financial crisis and irrational fear are stifling credit markets, so there's a shortage of liquidity among CDO buyers right now."

Mike links to a good New York Times wrap on the mark-to-market rule change that went down April 2 (note: I don't usually comment on people's faces, but this accounting chairman has got a real Jabba the Hutt thing going here; it reminds me of that old Spy magazine feature "Separated at Birth").
It is not clear how much bank profits will improve as a result of the change; that will depend on how much the banks use their newly approved discretion to set values. Nor is it clear whether investors will put much faith in the new figures.

Early answers to those questions may become available within a few weeks. The board said banks could apply the new rules to their financial statements for the quarter that ended this week.
As I posted yesterday, I think the banks will use the accounting rule change, along with a strong earnings season, to KILL THE GEITHNER PLAN IN THE CRADLE. They don't like his PPIP proposal to buy their dodgy assets because they don't want the true prices of the loans and securities revealed (through an auction process). They would have to readjust the inflated values they've assigned to a huge crumbling pile of assets, then look out: landslide. Some institutions would become all-too-obviously insolvent.

One more excerpt from the Times that shows the accounting standards board itself knows the banks are playing with the numbers (this from an objecting member of the panel):
One of the dissenters, Thomas J. Linsmeier, argued that accounting rules already allowed the “fiction all banks are well capitalized,” adding that the changes would “make them seem better capitalized.”
One thing that troubles me a lot in this financial crisis: we're getting deeper and deeper into the jungle of opacity. (Changing accounting rules to make it easier for banks to disguise the health of their assets; government stonewalling on releasing information about which banks got what funds through TARP and what collateral they put up; stress test results being released in a general way so as not to implicate any lousy banks).

There's a huge irony behind all this: what we need to work toward in a post-Lehman world is a more transparent financial system. Part of the reason we're in such a mess is because there were too many dark corners we didn't understand. But so far, the evidence we can summon the courage to become more transparent seems awfully weak.