The Financial Accounting Standards Board (FASB) has once again fallen in the tank for the financial sector. The current crisis is the product of financial obfuscation and distortion of true value and risk in the valuation of mortgage-backed securities.
Despite this core problem, FASB has decided that firms that hold mortgage-backed securities should be allowed to value them at a price that has no connection to what the deeply disrupted market would pay today.
Instead, these "toxic assets" will be allowed to be valued at a fairytale price based on what they might be worth in an "orderly" market. We haven't seen an orderly market for mortgage-backed securities since August of 2007, when the credit market first froze.
All this accounting hocus pocus is deja vu. In the late eighties, during the S and L crisis, accounting tricks like this were used to give banks "regulatory capital", "good will" and other phony substitutes for arms-length bargained prices. This smoke-and-mirrors approach prolongs the crisis.
Who will benefit from this attack on transparent accounting and accountability? The taxpayers will certainly lose. Under the recent Treasury proposal to set up a public -private partnered purchase of toxic assets from banks to private ventures through a highly leveraged investment, courtesy of FDIC guarantees and taxpayer funds, the banks must have an incentive to sell the toxic assets.
Now, thanks to the FASB rule change. The banks can now merrily pretend that these assets are worth much more than the entire world knows they are worth, and refuse to sell at all, or hold out for gross overpayment with taxpayer subsidized "sales". They can keep the toxic assets on their books, pretending that the assets are backed by pristine, valuable, reliably performing loans, in a well-ordered market.
In short, the banks that have barely held on to life with Trouble Asset Relief Fund (TARP) transfusions, will now find new life for their toxic assets, thanks to accounting distortions of reality. They can keep these on their books and pretend that the banks are not truly insolvent, as some surely are.
Smoke and mirrors accounting only delays the day of reckoning, and the eventual cost of that reckoning for taxpayers and the global financial system.