FASB Eases Mark to Market Rules - Wall Street Cheers

The Financial Accounting Standards Board ( FASB ) bowed to congressional and financial industry pressure on Thursday by allowing more flexibility in valuing toxic assets, a move expected to boost bank earnings and improve their capital levels.

While Wall Street welcomed the change which will allow banks to use a mark to model  method of setting a value for their toxic assets the move will only cover up the horrible loans and derivatives already on the banks books. The banks will certainly use their own model to carry nearly worthless assets, perhaps in some cases, entirely worthless, at values far in excess of current market value.

The change in the FASB guidelines will probably torpedo Tim Geithner’s latest plan to set up private-public auctions that he had hoped would remove the toxic assets off the banks books and into the hands of favored investor groups heavily financed by the government. Geithner has come under heavy fire for the plan as both noted economists Joseph Stiglitz and Paul Krugman have labeled the plan as a robbery scheme at the expense of the taxpayer.

The banks will now likely not want to risk an auction that while weighted in their favor by virtue of generous government financing to the bidding partnership may still set a value far less than if the banks can just hold onto the assets and mark them to model. After all it will be their own model that they will be using and I expect the evaluations will be in la la it’s a wonderful world after all land.

The Wall Street rally probably does have legs as it is coming from deeply oversold levels. However, I expect that the rally is only a sharp rally in a big bad bear market and when the bear goes to work again, probably sometime shortly after Memorial Day, the bottom truly will fall out.

The change in FASB accounting rules may look good to the banks for now but are sure to spread grief around later. Trash is trash no matter how it is temporarily evaluated and in time the trash will start to stink even no matter how hard the banks try to hide it. In addition, another pile of trash is on its way. The commercial real estate market is sinking fast. Empty office and retail space produces no income and a lot of maintenance expenses.

Many banks are insolvent now and poorly qualifies to handle a flood of non performing commercial real estate loans. By easing mark to market accounting rules the FASB is actually doing the nation a huge disservice. Zombie banks will stagger along longer than they should be allowed to stand and recovery will be delayed for years. A full recovery will probably never materialize.

Many of the banks toxic assets will get only worse as time goes by. We are not returning to the happy go go days of over leveraging and a crazy spend, spend, spend consumer based economy in our life times or ever. A new order will eventually evolve that will require downsizing of all things. Glossing over reality with mark to model accounting will only lead to greater pain over a longer time period.

But for now let the good times roll. Just keep your eye out for the big bad bear and beware of that horrid smell drifting out of big banks mortgage filling cabinets.