This headline is the headline of an article I would recommend everyone read about the financial crisis. This article, by Floyd Norris, can be found in the Friday morning New York Times (see http://www.nytimes.com/2009/09/11/business/economy/11norris.html?ref=business). As readers of this blog know, I have been a strong advocate of more transparent and open reporting from all organizations, but especially from financial institutions. Mark-to-market and the determination of fair values of financial assets, I believe, is a must going forward!
The bankers cry only after-the-fact, that is, once their bets on mismatched maturities on their balance sheets or on the assumption of riskier assets has gone sour. They can’t have it both ways, which is how little children want it. If you are going to take risks, Mr. Banker, then accept the responsibility for the risks that you take. Don’t cry about unfair accounting standards once the milk is spilt.
To me there are two major reasons why shareholders and regulators should be alerted to the bets that bankers have placed. The first has to do with achieving a more appropriate valuation of the stock of the bank or financial institution. Owners should know what bets have been placed so that they can incorporate risk into the valuations they are placing on the stock of the company they are interested in investing in. Regulators need to know as truly as possible the potential danger a bank faces and the treat the bank poses to the bank insurance fund.
The second reason has to do with management, itself. I have led the successful turnaround of three financial institutions. In each case, a major reason the banks got themselves in trouble was that managements repeatedly postponed, and then postponed again, dealing with problems because they could hide the problems from both the investment community and the regulatory bodies. This is also the case in the vast majority of troubled or failed institutions.
Successful managements must own up to the problems that they have created and act to correct those problems as soon as they can. The openness and transparency created by good accounting standards are important tools to create an environment in which managements do identify problems early and then act on them.
In a real sense, however, accounting standards are a crutch. Good executives require full disclosure of asset values and report this information to shareholders and regulators. They also act to resolve problems in a timely manner, as the problems are identified. Good executives create a culture in which they learn about problems as soon as possible because they don’t want surprises. I was taught that this is what good management is all about.
Perhaps we should post a list of all banks and bankers that are in favor of easing these reporting rules and discount the price of their common stock by 30% to 40% from current levels.
The reason?
To me, any banker that wants to ease up the rules on reporting the fair value of assets is, by definition, a poor manager and a poor leader. And, I do not want to invest in any organization that has poor management or poor leadership.
Showing posts with label Financial Accounting Standards Board. Show all posts
Showing posts with label Financial Accounting Standards Board. Show all posts
Friday, September 11, 2009
Thursday, April 2, 2009
FASB and the Mark-to-Market Rules
The Financial Accounting Standards Board (FASB) should have released their easier guidelines on ‘mark-to-market’ accounting on April Fool’s day because that date would have been much more appropriate for what they have done.
Once again the accounting profession has shown that accounting is an “art” rather than a professional practice and art, as we well know, like pornography, is in the eye of the beholder.
FASB has “revised the rules to allow companies to use their judgment to a greater extent in determining the ‘fair value’ of their assets. In other words, there are no rules!
Arguing for the change is, of course, the banks. The banks “have contended that during the current financial crisis, when many markets are frozen or not functioning smoothly, the rules have unfairly pushed those valuations lower and forced them to take big losses on the basis of market fluctuations that are temporary.”
There are three points I would like to emphasize here. First, an appropriate accounting for the financial condition of a firm is a prerequisite for understanding the state that the company is in. Without this knowledge, the customers of the banks, lenders as well as depositors, are at a loss about the financial condition of the bank, investors are at a loss about the condition of the bank, and regulators are at a loss about the condition of the bank.
Second, if the revised rules “allow companies to use their judgment” then there are no unbiased standards or relatively objective criteria by which to judge the condition of the bank. What good are financial statements if people can put whatever they want on their balance sheet?
Third, the explanation for the change includes the assumption that the problems being faced by the affected financial institutions are ones of liquidity and not ones of solvency. We are told that “when markets are frozen or not functioning smoothly” it will be hard to price the assets. We are being told that this is what the banks face today, the problem that for some bank assets, the markets in which they trade are illiquid.
What if the problem is, as some of us believe, that a few (or more) of these banks are insolvent and it is not just a problem of the liquidity, or illiquidity, of their assets?
The administration and the congress keep giving us solutions to the financial chaos around us that are intended to relieve the problem of liquidity. They seem to keep their head in the sand when it is suggested that maybe the problem is one of solvency.
And, what is the real underlying situation here? Banks and other financial institutions, in an effort to squeeze out a few extra basis points in terms of their return on equity, not only added assets to their balance sheets that exhibited a greater amount of credit risk, they also increased their leverage ratios to extraordinary lengths, and, in addition, added further interest rate risk to their balance sheets by increasing the mis-match of the maturities of their assets and liabilities.
They knew what they were doing! And, they knew what the consequences would be if things went against them!
Now, these same people are crying false tears because events did not go their way and they got caught!
Congress and others got mad at the executives of AIG for attempting to live up to the contracts that were given to employees in terms of the bonuses they were to receive. In the current situation, Congress and others are up-in-arms because they want to change the rules under which the banks and other financial institutions were to be held accountable for.
And Rick Wagoner can be forced out of GM, but the same bank leaders that got the banks where they are remain in their executive lofts.
Go figur’.
The financial performance of the banks will now improve. There are a dozen or so articles in the financial press contending that the new P-PIP will suffer because of the change in the accounting rules. Just what we need—another government program, like TARP, in which the nature of the program changes once the program has been presented to the public.
In truth, the condition of banks and other financial institutions has not changed! Those that are insolvent are still insolvent. Those that are not insolvent are still not insolvent. But, the public, the lenders, the depositors, the investment community, and the regulators are worse off.
The change in the accounting rules is another bailout for the bankers!
Happy April Fool’s day!
Once again the accounting profession has shown that accounting is an “art” rather than a professional practice and art, as we well know, like pornography, is in the eye of the beholder.
FASB has “revised the rules to allow companies to use their judgment to a greater extent in determining the ‘fair value’ of their assets. In other words, there are no rules!
Arguing for the change is, of course, the banks. The banks “have contended that during the current financial crisis, when many markets are frozen or not functioning smoothly, the rules have unfairly pushed those valuations lower and forced them to take big losses on the basis of market fluctuations that are temporary.”
There are three points I would like to emphasize here. First, an appropriate accounting for the financial condition of a firm is a prerequisite for understanding the state that the company is in. Without this knowledge, the customers of the banks, lenders as well as depositors, are at a loss about the financial condition of the bank, investors are at a loss about the condition of the bank, and regulators are at a loss about the condition of the bank.
Second, if the revised rules “allow companies to use their judgment” then there are no unbiased standards or relatively objective criteria by which to judge the condition of the bank. What good are financial statements if people can put whatever they want on their balance sheet?
Third, the explanation for the change includes the assumption that the problems being faced by the affected financial institutions are ones of liquidity and not ones of solvency. We are told that “when markets are frozen or not functioning smoothly” it will be hard to price the assets. We are being told that this is what the banks face today, the problem that for some bank assets, the markets in which they trade are illiquid.
What if the problem is, as some of us believe, that a few (or more) of these banks are insolvent and it is not just a problem of the liquidity, or illiquidity, of their assets?
The administration and the congress keep giving us solutions to the financial chaos around us that are intended to relieve the problem of liquidity. They seem to keep their head in the sand when it is suggested that maybe the problem is one of solvency.
And, what is the real underlying situation here? Banks and other financial institutions, in an effort to squeeze out a few extra basis points in terms of their return on equity, not only added assets to their balance sheets that exhibited a greater amount of credit risk, they also increased their leverage ratios to extraordinary lengths, and, in addition, added further interest rate risk to their balance sheets by increasing the mis-match of the maturities of their assets and liabilities.
They knew what they were doing! And, they knew what the consequences would be if things went against them!
Now, these same people are crying false tears because events did not go their way and they got caught!
Congress and others got mad at the executives of AIG for attempting to live up to the contracts that were given to employees in terms of the bonuses they were to receive. In the current situation, Congress and others are up-in-arms because they want to change the rules under which the banks and other financial institutions were to be held accountable for.
And Rick Wagoner can be forced out of GM, but the same bank leaders that got the banks where they are remain in their executive lofts.
Go figur’.
The financial performance of the banks will now improve. There are a dozen or so articles in the financial press contending that the new P-PIP will suffer because of the change in the accounting rules. Just what we need—another government program, like TARP, in which the nature of the program changes once the program has been presented to the public.
In truth, the condition of banks and other financial institutions has not changed! Those that are insolvent are still insolvent. Those that are not insolvent are still not insolvent. But, the public, the lenders, the depositors, the investment community, and the regulators are worse off.
The change in the accounting rules is another bailout for the bankers!
Happy April Fool’s day!
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