FASB'S SPRING HAT FANTABULISM
Managements, especially bank managements, will decide when to realize losses that the market has already recognized, if it is judged that the transactions that formed the 'market' were fire-sale, i.e. not "orderly on the weight of the evidence".
This puts a LOT of say-so into Bank hands. On the other hand, it does remove a mechanism in which market pessimism can become self-reinforcing, by dragging down bank asset quality as 'measured' by markets charging huge liquidity premia... (a reason why stocks likely rose, today).
It does appear that banks will have to disclose their valuation assumptions. We'll see how comprehensive those disclosures are.
The cash flows will be the cash flows. FASB's rulemaking, of course, doesn't do anything to alter that simple truth for all, including legacy assets.
If commercial real-estate loans or private-equity loans go bad, so that they are no longer on accrual-basis, flipping this switch isn't really relief of any kind. For spikes in defaults in pooled securities or collateralized securities, this change has the effect of merely pushing the realization of losses down the road.
Pushing losses down the road (while talking up prospects) is a reason why today's bank stock prices would rise and a reason for those trying to write a policy script for recovery to be afraid, because the timing is now expanded, the pain-to-be-taken rendered chronic, not acute....
The idea that bank capital is 'protected', even in the short term, is an illusion (bank control is what is protected, arguably). The reality is that stronger institutions will 'mark down' as quickly as possible, under normal circumstances, putting pressure on the weaker ones.
Who ever said that accounting wasn't fashionably exciting?
Thursday, April 2, 2009
FASB Puts Banks In Control, More Fully
