Bank Stress Tests: A Substitute for "Mark-to-Market" Accounting?

“The FDIC Board yesterday issued a notice of proposed rulemaking that would require FDIC-insured state nonmember banks and state-chartered savings associations with more than $10 billion in total consolidated assets to conduct annual capital-adequacy stress tests. As of Sept. 30, 2011, the FDIC regulated 23 state nonmember banks with more than $10 billion in total assets. 

The Dodd-Frank Act-mandated proposal defines the term “stress test”; establishes methodologies for conducting stress tests that provide for three different sets of conditions, including baseline, adverse and severely adverse conditions; establishes the form and content of a stress-test regulatory report; and requires covered banks to publish a summary of stress-test results. 

The proposal is similar to one the Federal Reserve published in December.”  (Daily Newsbyte release of the American Bankers Association, January 18, 2012)

The commercial banking industry has not wanted to adopt “mark-to-market” accounting.  There are several reasons bankers do not want to do so, but, in my mind, the most prominent reason is that they don’t want to be accountable for taking on risk…both credit risk and interest rate risk.

Remember, I have been a banker for a large part of my professional life.   

Generally, you hear bankers complain about mark-to-market accounting after-the-fact.  That is, they complain when the value of their assets have declined.  The decline in the value of an asset has either come because the asset has “gone bad” (for whatever reason), or, because interest rates have risen and the price of a security has declined.  

In the first case, the argument forthcoming from the bankers is that either the asset needs time for the economy to recover or the asset needs time for the bank to help “work out” its problems.  In the second case, bankers argue that they will hold the asset to maturity so that no capital loss will need to be realized on the asset. 

Thus, the bankers have put on assets that have higher than average credit risk or long term assets that possess interest rate risk and have not had to account for any increase in the over all riskiness of bank assets until they either write off the asset or sell the asset for a price that is below its purchase price.

But, that can mean that there are a lot of “over-valued” assets on the books of the banks.

Because banks do not have to mark their assets to market, the banking system can have lots of “zombie” banks around, banks whose financial condition is unknown to their investors or depositors. (http://seekingalpha.com/article/319205-there-are-still-zombie-banks-around)

The presence of these banks, and not just the largest banks, can be noted in the Wall Street Journal article about Florida’s BankUnited. (http://professional.wsj.com/article/SB10001424052970203735304577167241414198390.html?mod=ITP_moneyandinvesting_0&mg=reno-secaucus-wsj) The BankUnited situation is unique in that it is a bank that was acquired by an individual, John Kanas, and a group of private-equity firms.  BankUnited was a failing bank that was purchased from the FDIC and made into a profitable organization, one that is well capitalized and growing. 

Yet, the desire was for the bank to grow more, and grow by acquisition, but this has not been possible because “other Florida banks are either too sick or too expensive…“Mr. Kanas’s team has examined more than 50 potential targets in the past few years but pulled the trigger on just one.” 

The banking system is still not healthy and when “outsiders”, like Mr. Kanas and his team, actually get to review the assets of a bank during a due diligence, they find out just how fragile the banking system is. 

The original acquisition of BankUnited was done in an assisted deal that “The FDIC estimates that the failure will ultimately cost its deposit-insurance fund $5.7 billion.”  Deals are still being made for “failed” or “troubled” banks, (there are still about 850 banks on the FDIC’s list of problem banks) but the efforts to complete them and the frustration connected with “the regulatory red tape that is increasingly gripping the industry” are costly and tiresome.

Mr. Kanas is in the process of selling BankUnited and is leaving the industry.  “’He is just tired,’ said a person who knows Mr. Kanas well.”

It seems to me that the imposition of “stress tests” on the banks with more than $10 billion in assets is a way to for the regulators to “mark-to-market” the assets of these banks!   The regulators are to see what happens to the value of the assets of a bank under “three different sets of conditions, including baseline, adverse and severely adverse conditions.”

These “stress tests” are just simulations, but, the purpose of the tests are on to determine how vulnerable banks are to changing market conditions.  In other words, are the banks sufficiently capitalized to withstand detrimental movements in financial markets.

This exercise basically “marks-to-market” the loans and securities held by a bank under different scenarios.  And, the exercise is conducted by the bank regulators and not by the banks themselves.  Furthermore, the Dodd-Frank mandate “requires covered banks to publish a summary of stress-test results.”  That is, the results of these tests cannot be hidden.

Because the commercial banks would not reveal their risk exposure voluntarily and of their own making, the regulators will now design the tests relating to the risk exposure of the banks and will force the banks to reveal the results of the tests publically.

One just wonders how long it will take for the regulators to extend these “stress tests” to all financial institutions with assets of $1.0 billion or more.  And, then...

I hope the bankers are happy with the consequences of their failure to disclose!    

Debt and Accounting Gimmicks

Isn’t it interesting that highly leveraged institutions and organizations seem to bring out very innovative accounting strategies?

It is in times like these that were learn just how creative accountants can be. 

“Weekend elections that threaten to drive Spain’s ruling Socialist party from power in several regions and cities also promise a potentially nasty surprise: the revelation of piles of undisclosed debt in local governments that could undercut the country’s drive to avoid an international bailout.” (See “Spain Vote Threatens to Uncover Debt,” http://professional.wsj.com/article/SB10001424052748704281504576331280001740702.html?mod=ITP_pageone_2&mg=reno-wsj.)

“Five months ago, a government change in Spain’s Catalonia region revealed a budget deficit more than twice as big as previously reported.  Now a growing chorus of economists, local politicians and business leaders say that new governments are likely to discover, as Catalonia did, piles of ‘hidden debt’ owed to health clinics and other suppliers.”  It is suggested that “there is widespread, unrecorded debt among once-free-spending local governments.  Some companies are complaining that fiscally frail administrations are pressuring them to do business off the books and not immediately bill for goods and services…”   

“Such bills could add tens of billions of euros to the official debt figures reported by local and regional governments.  If such skeletons come out of the closet in coming weeks, Spain’s cost of funding could continue to rise—throwing the country back into the limelight after it has struggled to demonstrate it doesn’t need to be bailed out like Greece, Ireland, and Portugal.”

Wait a minute…didn’t the renewal of concern over the debt situation in Greece come about because it was discovered that the amount of debt owed by the Greek government was worse than had been previously accounted for. 

We don’t need to just keep picking on European states.  What about state and local governments in the United States?  Pension funds grossly underfunded?  Off-balance sheet financing?  And more?

But, why stick with governments?  What about Lehman Brothers?  What about AIG?  What about Citigroup?  The amounts of off-balance sheet tricks used by these organizations fill the current library of books about the recent financial crisis.  The story is about CDOs and SUVs and so forth.  Trying to disguise liabilities is not just a gimmick of the public sector. 

To me, however, this mis-accounting goes even further.  The question really is one about where do you draw the line.  That is, what types of accounting efforts are meant to evade discovery and hence are not exactly kosher…and which ones are of little or no harm? 

For example, how do you value an asset on the balance sheets of financial institutions?  If you hold a marketable security you must be concerned with the liquidity of that security when valuing the asset.  If interest rates rise and the market price of the security goes down, do you mark-to-market the value of the security on your balance sheet?  If the security is a part of the trading portfolio of the institution then the general answer is that the value of the security on the balance sheet should be marked down.

But, if the institution bought the security to hold then the question becomes more difficult for some people to answer because the intention is to hold the security to maturity at which time the full amount of the principal would be repaid to the institution.

Now, what if the credit quality of the security comes into question?  There are really two questions here: the first has to do with the credit quality of the security; the second has to do with the liquidity of the security?  If the credit quality of the security declines, then, given the value of the asset should decline…its price should fall.  Thus, the market price of the security should decline.  However, if the market is uncertain about how to price the asset, given the decline in its quality, the market for the security may “dry up” and the security may not be able to be sold immediately.

Thus, the value of the asset on the balance sheet should be adjusted downward, but without any market judgment about what the price of the security should be…how do you determine the amount the asset should be written down?

Here we have a problem that was addressed by the US government’s Troubled Asset Recovery Program (TARP) during the financial crisis.

Many in the financial industry have argued that the assets should not be marked-to-market in such cases because there is really no market for the asset.  Hence, these securities should be retained on the balance sheet at book value.

Now, what about the direct loans a financial institution makes?  Almost all of these do not have markets in which they can be sold.  So, the loans are totally “illiquid”.  Furthermore, bankers consider that most of the problems the borrowers face are “cyclical” and all that is needed when economic times are not good is for the economy to improve and the loans will work themselves out.  That is, the financial institutions must hold the loans “to maturity” and, thus, they can be held on the balance sheet at book value. 

The question is…what should be the accounting treatment of these assets of financial institutions?

Of course, this problem only occurs during bad times after most of the economy has become excessively leveraged and loan value are under attack.  For example, currently, in terms of residential real estate loans, mortgages, we see that seriously delinquent loans (90 days or more delinquent) are declining but still near historic highs, the number of borrowers in foreclosure remain near record highs, and the sale of houses and housing prices continue to decline. (http://professional.wsj.com/article/SB10001424052748704816604576333222700445278.html?mod=ITP_moneyandinvesting_1&mg=reno-wsj) The commercial real estate area remains depressed.  The loans of these two kinds of loans continue to plummet. (http://seekingalpha.com/article/270074-fed-continues-to-pump-reserves-into-foreign-related-institutions-in-the-u-s)  But, has the status of these loans been changed on the books of the banks?

The concern, in these cases, is not with the liquidity of the asset.  The concern is with the solvency of the financial institutions.  Have accounting practices not given investors…and others…a true picture of the financial condition of the institutions under review? 

My concern in all these cases is that we really don’t find out the truth until too late…until it is “after-the-fact.”   Then we blame speculators or others, who take advantage of the situation, of preying on the innocent, of creating the crisis, and, of course, we don’t want to reward speculators. (http://professional.wsj.com/article/SB10001424052748704904604576333393150700686.html?mod=ITP_pageone_2&mg=reno-wsj)  

The bottom line: the pressure to use accounting gimmicks to cover up the “real picture” grows as high degrees of leverage come to dominate an economy.  This is because debt requires contractual payments.  Debt requires an obligation and a responsibility. 

And, so we see a pattern.  Just as credit inflation is the foundation for greater risk-taking, higher degrees of leverage, and more financial innovation, we see that greater risk-taking, higher degrees of leverage, and more financial innovation is the foundation for more creative accounting practices. 

In both cases, we all ultimately lose in the end!

For the Banks, Mark-to-Market Accounting Dies Again!

“Strategic vision of financial executives on how to generate economic performance while controlling risk is likely to become a differentiating factor, a determinant of not only success but of the very economic viability of financial institutions in the changed world. Have leading financial firms and institutional investors come to the same conclusion?”

This is from the book “Financial Darwinism” by Leo Tilman.( http://seekingalpha.com/article/221607-making-money-in-the-21st-century-financial-darwinism-create-value-or-self-destruct-in-a-world-of-risk-by-leo-tilman)

The banking industry has provided an answer and the answer is “No!”

The banks have beaten down the accounting industry: “Banks Force Retreat on Fair-Value Plan” is the title in the print edition of the January 26, 2011 Wall Street Journal; “Retreat on ‘Marking to Market’” is the title in the electronic edition. (http://professional.wsj.com/article/SB10001424052748704013604576104012708309774.html?mod=ITP_moneyandinvesting_1&mg=reno-wsj)

“Accounting rule makers, bowing to an intense lobbying campaign, took a key step Tuesday to reverse a controversial proposal that would have required banks to use market prices rather than cost in order to value the loans they hold on their balance sheets.

The debate over the proposal is the latest chapter in a battle pitting investors who wanted better disclosure of the value of bank’s assets against the banks themselves. Banks have argued against so-called fair-value accounting, saying market prices would have left them at the mercy of volatile markets and could have caused additional strain during the financial crisis.”

The banking industry is still back in the middle ages. And, this is just what Tilman is arguing about.

To Tilman, the “golden age” of banking was when commercial banks worked with a “Static Model” of banking. Banks lived off the “carry trade”: because of highly restricted and regulated banking markets, banks operated in quasi-monopoly positions where they could earn relatively high returns on the loans they made and pay zero or close to zero on the deposits they attracted, providing them with a “lusty” net interest margin (NIM). Their model was static because they could originate loans or buy securities and hold them until they matured. Marking to market was not an issue. Credit risk was the only real risk bank lenders had to be worried about.

Today a “Dynamic Model” of banking exists and the transition to this dynamic model was horrendous. The “buy and hold” strategy could no longer work. In the late 1960s, interest rates began to rise. In the 1970s, declining NIMs became a major problem and the banks countered the declining margins by moving into fee income. In the 1980s all hell broke loose as NIMs practically vanished and banks began diversifying into other assets in order to generate returns that justified their existence.

Banks did not adjust their thinking in terms of risk management during this time period. As Tilman describes in his book, as commercial banks moved into Principal Investments (α-type investments) and investments exhibiting Systematic Risks (β-type investments) their risk management knowledge and skills lagged far behind the dynamic changes that were taking place in financial markets.

On top of this commercial banks continued to add leverage to their balance sheets as a means of generating another 5 or 10 basis points or more to their return on equity.

When the cookie began to crumble, it became obvious that financial institutions had mis-managed their risk exposure and had leveraged-up to such a degree that there was little or no way to keep the cookie together. The industry had to be bailed out.

In the modern world where the “Dynamic Model” of financial management rules, the “buy-and-hold” philosophy that applied to the “Static Model” of banking is legacy.

By getting rid of “Mark-to-Market” the banking industry is kidding itself and just setting itself
up for future trauma. It is hiding its head in the sand and pretending that the world has not changed.

The world has changed. Net interest margins are not what they once were. Buy-and-hold policies are not realistic. And financial leverage is going to be more severely regulated. So who is going to manage risk if it is hidden on the balance sheet?

My advice to bank managements: mark your portfolios to market. You don’t have to, but, for once, “get real.” If you are going to buy risky long term investments…accept the fact that they are subject to interest rate risk…and credit risk. You don’t get the return unless you assume something to justify the extra return. Who are you fooling by not marking-them-to-market? You are only kidding yourselves.

Tilman argues that generating “economic performance while controlling risk” is going to be “a differentiating factor”, a determinant of success but also of the economic viability” of a financial institution.

In the 1950s and 1960s banking was a very quiet and stable environment. The industry did not attract the “best and the brightest.” There was the joke around Philadelphia that in wealthy families that had three sons, the smartest became a doctor, the next smartest became a lawyer: the dumbest became a banker.

The thrift industry was even worse. Tilman titles his book “Financial Darwinism.” In the case of survival, most thrift managements were awful, much worse than bank managements, and, the thrift industry is dead,! Are the smaller commercial banks the next in line for extinction?

When I joined the Finance Department at the Wharton School, UPENN, (in 1972) "Finance" did not have a course on the financial management of commercial banks. (I did create that course while I was there.) The reason why no bank management course existed was that the big banks, City, Morgan, Chase, and so on, did not recruit students at Wharton. They recruited from the history department, the literature department, and so forth…well, they really recruited from the social clubs, the tennis team, and the golf team. They wanted people who could socialize with customers and get along with them at the highest social levels. They didn’t want some sharp intellect that was quantitatively orientated to work in “their shop.”

Bankers have never liked uncomfortable situations. They have been notorious for keeping bad loans on their books until they absolutely have to charge them off. They are also notorious for refusing to acknowledge that some of their assets might be “under-water”. Bankers are notorious as risk managers.

Risk management is going to be a major differentiator of bank performance in the future. We have seen how inadequate risk management can help the industry self-destruct. Anyone investing in banks…or regulating banks…should pay special attention to how a management recognizes risk; the policies and procedures it puts in place to manage risk; and the efforts it makes to disclose to people the value of the assets the bank has on its balance sheet.

The banking industry is changing. I have just written up my view of some of the changes that are coming (See http://seekingalpha.com/article/247809-banking-is-changing-look-out-for-opportunities) Good risk management is going to be a “decider” of who survives

Banks, Disclosure, and Reform

Bankers can’t have it both ways. Either they are going to have to honestly disclose their positions or they are going to face more and more intrusion into their operations.

The honesty factor is a concern if banks continue to publically lie about their balance sheet positions. I have written about this before in my May 5 post “Can the Financial System Still be Trusted”, http://seekingalpha.com/article/203077-can-the-financial-system-still-be-trusted. Others are providing clearer evidence of this behavior. See the Wall Street Journal of May 26, “Banks Trim Debt, Obscuring Risks”, http://online.wsj.com/article/SB20001424052748704792104575264731572977378.html#mod=todays_us_front_section. The Journal followed this with another on May 27, “BofA, Citi Made ‘Repos’ Errors” http://online.wsj.com/article/SB10001424052748704032704575268902274399416.html#mod=todays_us_money_and_investing.

If banks want our trust, they are going to have to be honest with us.

The disclosure factor I am referring to pertains to mark-to-market accounting. The Financial Accounting Standards Board has proposed that commercial banks mark the value of their loan portfolios to “fair value” standards. Banks already use mark-to-market accounting for other assets on their balance sheets, although they basically don’t like this requirement.

The general argument provided by the bankers is that this mark-to-market requirement would require banks to take “big losses” on loans during certain periods of economic distress and this “could” be misleading because the loans “would probably still pay off over time” This analysis is from today’s New York Times: http://www.nytimes.com/2010/05/27/business/27fasb.html?ref=todayspaper.

This argument infuriates me. I have been the President and CEO of two financial institutions and the CFO of a third, all publically traded companies, and if I have heard this argument one time I have heard it a thousand times. And, in most cases, the statement has referred to loans that eventually were written down or written off.

The argument, ironically, is not applied to the loans that do perform! My experience is that the claim is a defensive statement from a loan officer or bank executive that is overly sensitive to the fact that they have not performed and don’t want this fact publically recognized.

I would add two things to this discussion. First, when loans start to go bad, a good management should want to identify the problems as soon as possible so that they can do something about them. Postponing dealing with loans that are experiencing some trouble can only lead to more trouble in the future. Well run institutions are ones that deal with their problems “up front” and do not try and hide them in the hopes that they will go away.

Second, bankers take risks: credit risk, interest rate risk, liquidity risk, leverage risk, and other forms of risk. This is their job. But, there is a cost of taking risk. As we have seen from the recent financial buildup and collapse, during periods of credit inflation, asset bubbles, and other cases of excess, bankers push the edge taking on more credit risk, more interest rate risk, more leverage risk, and so on.

In order to maintain our trust in banks and the banking system we need to know what the banks have done and how their decisions have affected the value of the assets on their balance sheets.

“Critics of applying fair value to loans have said the existing use of fair value has deepened the financial crisis by forcing financial firms to take unjustified losses on assets that shrank in value when market conditions worsened temporarily.” (See http://online.wsj.com/article/SB20001424052748704032704575268962900687370.html#mod=todays_us_money_and_investing.)

Come on, be big boys and girls. You made the decisions! Accept the consequences of those decisions!

In terms of financial reform, I am more in favor of using “early warning” systems like the one recently proposed by Oliver Hart and Luigi Zingales in the journal National Affairs , http://nationalaffairs.com/publications/detail/curbing-risk-on-wall-street, and “To Regulate Finance, Try the Market” in Foreign Policy, http://experts.foreignpolicy.com/blog/5478. But, to go this route, financial institutions should be open to full disclosure and accounting transparency. I will write more on the Hart/Zingales approach in the near future.

I happen to believe that this kind of behavior, the encouragement of openness and transparency, represents good management practices. (See my post “On Audits and Auditors”, http://seekingalpha.com/article/195594-on-audits-and-auditors.) Using a sports analogy again: good teams and good players do not rely on trickery…they just outperform other teams and players that have to use deceit and deception to try and get the upper hand!

Good managers and good managements are not afraid of “the open air”!

The alternative is for there to be more explicit attempts to regulate and control the financial institutions. Going this direction ultimately fails (see my post “The ‘Sound and Fury’ of Banking Reform”, http://seekingalpha.com/article/206341-the-sound-and-fury-of-banking-reform) but it is time consuming, expensive and inconvenient in the process. And, choosing this path leads to ‘cat-and-mouse’ games that do not contribute to increasing the public’s faith and trust in the banking system and the regulators.

This seems to be one of the major problems of modern America. In my memory, there was a time when we could have faith and trust in our business and financial institutions and in our government and in each other. This ‘faith and trust’ is sorely missing now. It would be nice if some leaders appeared that actually tried to restore these characteristics to our national life. I just don’t see any of this kind of leadership on the horizon.

In my mind, banks need to take a leadership position on the “Disclosure” process and assume a stance that is more disciplined than would be imposed by any regulatory standard. In doing this they would take control of the issue.

Or, they must accept the lack of faith and lack of trust that follows a government-led effort to constrain and control them. They cannot fight disclosure and fight greater government oversight at the same time.

Accountants Misled Us Into Crisis

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.

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!