The motto seems to be, 'if the pig is butt-ugly, change the rules to allow for application of lipstick.'
http://www.bloomberg.com/apps/news?pid=20601109&sid=awSxPMGzDW38&refer=home
Mark-to-Market Lobby Buoys Bank Profits 20% as FASB May Say Yes
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By Ian Katz and Jesse Westbrook
March 30 (Bloomberg) -- Four days after U.S. lawmakers berated Financial Accounting Standards Board Chairman Robert Herz and threatened to take rulemaking out of his hands, FASB proposed an overhaul of fair-value accounting that may improve profits at banks such as Citigroup Inc. by more than 20 percent.
The changes proposed on March 16 to fair-value, also known as mark-to-market accounting, would allow companies to use âsignificant judgmentâ in valuing assets and reduce the amount of writedowns they must take on so-called impaired investments, including mortgage-backed securities. A final vote on the resolutions, which would apply to first-quarter financial statements, is scheduled for April 2.
FASBâs acquiescence followed lobbying efforts by the U.S. Chamber of Commerce, the American Bankers Association and companies ranging from Bank of New York Mellon Corp., the worldâs largest custodian of financial assets, to community lender Brentwood Bank in Pennsylvania. Former regulators and accounting analysts say the new rules would hurt investors who need more transparency, not less, in financial statements.
Officials at Norwalk, Connecticut-based FASB were under âtremendous pressureâ and âmore or less eviscerated mark-to- market accounting,â said Robert Willens, a former managing director at Lehman Brothers Holdings Inc. who runs his own tax and accounting advisory firm in New York. âIâd say there was a pretty close cause and effect.â
Willens, investor-advocate groups including the CFA Institute in Charlottesville, Virginia, and former U.S. Securities and Exchange Commission Chairman Arthur Levitt oppose changes that would enable banks to put off reporting losses.
âOutrageous Threatsâ
âWhat disturbs me most about the FASB action is they appear to be bowing to outrageous threats from members of Congress who are beholden to corporate supporters,â said Levitt, now a senior adviser at buyout firm Carlyle Group and a board member at Bloomberg LP, the parent of Bloomberg News.
FASB spokesman Neal McGarity said the proposal allowing significant judgment was âin the works prior to the Washington hearing and was merely accelerated for the first quarter, instead of the second quarter.â The plan on impaired investments âwas an attempt to address an important financial reporting issue that has emerged from the financial crisis,â he said.
Mary Schapiro, sworn in as SEC chairman in January, testified to Congress on March 11 that the agency recommends âmore judgment in the application, so that assets are not being written down to fire-sale prices.â
Unrealized Losses
Goldman Sachs Group Inc. investment strategist Abby Joseph Cohen and Nouriel Roubini, the New York University professor who predicted last yearâs economic crisis, made bearish forecasts last week about the outlook for the banking industry. Cohen says banks arenât yet âin the clear,â and Roubini expects the government to nationalize more lenders as the economy contracts. The 24-member KBW Bank Index rose 21 percent in March, after slumping 75 percent during the prior 12 months.
By letting banks use internal models instead of market prices and allowing them to take into account the cash flow of securities, FASBâs change could boost bank industry earnings by 20 percent, Willens said. Companies weighed down by mortgage- backed securities, such as New York-based Citigroup, could cut their losses by 50 percent to 70 percent, said Richard Dietrich, an accounting professor at Ohio State University in Columbus.
âThis could turn net losses into significant net gains,â Dietrich said. âIt may well swing the difference as to whether bank earnings are strong this quarter, or flat to negative.â
âUnintended Consequencesâ
Citigroup had $1.6 billion of losses last year for so- called Alt-A mortgages, according to the companyâs annual report. That loss would be erased with the new FASB rules, Dietrich said.
Bank of America Corp. in Charlotte, North Carolina, reported âincome before income taxesâ last year of $4.4 billion. The FASB proposal on impaired securities would increase that figure by about $3.5 billion, or the amount of âother- than-temporaryâ losses that the company recognized, Dietrich said. The new rule would mean the loss would be stripped out of net income, boosting earnings, though it would still be reported in financial statements.
âWeâre studying the proposals,â Bank of America spokesman Scott Silvestri said. Citigroup spokesman Michael Hanretta declined to comment.
While helping lenders report higher earnings, FASBâs changes may hurt Treasury Secretary Timothy Geithnerâs plan to remove distressed assets from bank balance sheets, Dietrich said. Allowing companies to hold on to assets without writing them down could discourage them from selling the securities, which would work against Treasuryâs objective to resuscitate markets, he said.
âItâs one of the unintended consequences of having the FASB bow to political pressure,â Dietrich said.
Bank Lobbying
Fair-value requires companies to set values on most securities each quarter based on market prices. Banks argue that the rule doesnât make sense when trading has dried up because it forces them to write down assets to less than theyâre worth.
âMark-to-market is fundamentally not about a quote on a screen,â Richard Kovacevich, chairman of San Francisco-based Wells Fargo & Co., said in a March 13 speech.
Conrad Hewitt, a former chief accountant at the SEC who stepped down in January, said representatives from the ABA, American International Group Inc., Fannie Mae and Freddie Mac all lobbied him over the past two years to suspend the fair- value rule.
Executives âwould come to me in the afternoon with the argument, âYouâve got to suspend it,ââ Hewitt said in a March 25 interview. The SEC, which oversees FASB, would reject their demands, and âthe next morning their lobbyists would go to Congress,â he said.
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http://www.bloomberg.com/apps/news?pid=20601109&sid=awSxPMGzDW38&refer=home
Mark-to-Market Lobby Buoys Bank Profits 20% as FASB May Say Yes
Share | Email | Print | A A A
By Ian Katz and Jesse Westbrook
March 30 (Bloomberg) -- Four days after U.S. lawmakers berated Financial Accounting Standards Board Chairman Robert Herz and threatened to take rulemaking out of his hands, FASB proposed an overhaul of fair-value accounting that may improve profits at banks such as Citigroup Inc. by more than 20 percent.
The changes proposed on March 16 to fair-value, also known as mark-to-market accounting, would allow companies to use âsignificant judgmentâ in valuing assets and reduce the amount of writedowns they must take on so-called impaired investments, including mortgage-backed securities. A final vote on the resolutions, which would apply to first-quarter financial statements, is scheduled for April 2.
FASBâs acquiescence followed lobbying efforts by the U.S. Chamber of Commerce, the American Bankers Association and companies ranging from Bank of New York Mellon Corp., the worldâs largest custodian of financial assets, to community lender Brentwood Bank in Pennsylvania. Former regulators and accounting analysts say the new rules would hurt investors who need more transparency, not less, in financial statements.
Officials at Norwalk, Connecticut-based FASB were under âtremendous pressureâ and âmore or less eviscerated mark-to- market accounting,â said Robert Willens, a former managing director at Lehman Brothers Holdings Inc. who runs his own tax and accounting advisory firm in New York. âIâd say there was a pretty close cause and effect.â
Willens, investor-advocate groups including the CFA Institute in Charlottesville, Virginia, and former U.S. Securities and Exchange Commission Chairman Arthur Levitt oppose changes that would enable banks to put off reporting losses.
âOutrageous Threatsâ
âWhat disturbs me most about the FASB action is they appear to be bowing to outrageous threats from members of Congress who are beholden to corporate supporters,â said Levitt, now a senior adviser at buyout firm Carlyle Group and a board member at Bloomberg LP, the parent of Bloomberg News.
FASB spokesman Neal McGarity said the proposal allowing significant judgment was âin the works prior to the Washington hearing and was merely accelerated for the first quarter, instead of the second quarter.â The plan on impaired investments âwas an attempt to address an important financial reporting issue that has emerged from the financial crisis,â he said.
Mary Schapiro, sworn in as SEC chairman in January, testified to Congress on March 11 that the agency recommends âmore judgment in the application, so that assets are not being written down to fire-sale prices.â
Unrealized Losses
Goldman Sachs Group Inc. investment strategist Abby Joseph Cohen and Nouriel Roubini, the New York University professor who predicted last yearâs economic crisis, made bearish forecasts last week about the outlook for the banking industry. Cohen says banks arenât yet âin the clear,â and Roubini expects the government to nationalize more lenders as the economy contracts. The 24-member KBW Bank Index rose 21 percent in March, after slumping 75 percent during the prior 12 months.
By letting banks use internal models instead of market prices and allowing them to take into account the cash flow of securities, FASBâs change could boost bank industry earnings by 20 percent, Willens said. Companies weighed down by mortgage- backed securities, such as New York-based Citigroup, could cut their losses by 50 percent to 70 percent, said Richard Dietrich, an accounting professor at Ohio State University in Columbus.
âThis could turn net losses into significant net gains,â Dietrich said. âIt may well swing the difference as to whether bank earnings are strong this quarter, or flat to negative.â
âUnintended Consequencesâ
Citigroup had $1.6 billion of losses last year for so- called Alt-A mortgages, according to the companyâs annual report. That loss would be erased with the new FASB rules, Dietrich said.
Bank of America Corp. in Charlotte, North Carolina, reported âincome before income taxesâ last year of $4.4 billion. The FASB proposal on impaired securities would increase that figure by about $3.5 billion, or the amount of âother- than-temporaryâ losses that the company recognized, Dietrich said. The new rule would mean the loss would be stripped out of net income, boosting earnings, though it would still be reported in financial statements.
âWeâre studying the proposals,â Bank of America spokesman Scott Silvestri said. Citigroup spokesman Michael Hanretta declined to comment.
While helping lenders report higher earnings, FASBâs changes may hurt Treasury Secretary Timothy Geithnerâs plan to remove distressed assets from bank balance sheets, Dietrich said. Allowing companies to hold on to assets without writing them down could discourage them from selling the securities, which would work against Treasuryâs objective to resuscitate markets, he said.
âItâs one of the unintended consequences of having the FASB bow to political pressure,â Dietrich said.
Bank Lobbying
Fair-value requires companies to set values on most securities each quarter based on market prices. Banks argue that the rule doesnât make sense when trading has dried up because it forces them to write down assets to less than theyâre worth.
âMark-to-market is fundamentally not about a quote on a screen,â Richard Kovacevich, chairman of San Francisco-based Wells Fargo & Co., said in a March 13 speech.
Conrad Hewitt, a former chief accountant at the SEC who stepped down in January, said representatives from the ABA, American International Group Inc., Fannie Mae and Freddie Mac all lobbied him over the past two years to suspend the fair- value rule.
Executives âwould come to me in the afternoon with the argument, âYouâve got to suspend it,ââ Hewitt said in a March 25 interview. The SEC, which oversees FASB, would reject their demands, and âthe next morning their lobbyists would go to Congress,â he said.
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