BANKS HAVE THEIR WAY WITH FASB / THE WALL STREET JOURNAL ( HIGHLY RECOMMENDED READING )

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JANUARY 26, 2011.

Banks Have Their Way With FASB

 By DAVID REILLY

The banks got what they wanted. Accounting rule makers on Tuesday dropped a plan to require banks to value loans using market prices.


That means investors will remain reliant on banks' own views of the worth of their assets. Those judgments proved seriously flawed during the financial crisis and left many with insufficient capital. Taxpayers, who as a result were called upon to bail out numerous institutions, also are left more vulnerable.


The Financial Accounting Standards Board's original proposal, put forward last spring, had called for banks to reflect market values in the total worth of their assets, which would affect their equity. Changes in market values, however, wouldn't have immediately affected profit, nor would it likely have been reflected in measures of regulatory capital.


Banks generally oppose the use of market prices because, they say, it makes their results more volatile. Their intense lobbying efforts against the proposal likely got a leg up after FASB Chairman Robert Herz, who had supported the plan, unexpectedly departed in August. FASB cited strong opposition it received in public comments in changing course.


Its decision means banks largely will continue to value loans as they do today, basing values on their original cost less a reserve to reflect the possibility of loss. FASB has yet to decide if the market value for loans will be disclosed on the balance sheet or buried in the footnotes, as they are now.


This isn't the first time FASB has retreated in the face of opposition. In 2009, under congressional pressure, it watered down mark-to-market rules. Sadly, FASB now seems to be guided by public pressure, rather than striving to see that investors get the most relevant and reliable information.