In the height of the financial crisis, the Financial Accounting Standards Board were pressured to pass FASB 157 (“Fair-value accounting”).
Banks were complaining that some of their holdings were difficult to value, thinly traded, tough to mark. So 157 passes and it allows the accountants at banks to mark these to a model rather than the last trade.
Derided as “Mark-to-Make-Believe” it leads to this unfortunate situation: The same models that led to the unfortunate money-losing purchase decision in the first place are now being used to actually value these holdings. regardless of the obvious flaw in the model in the first place.
As these bad buys plummet in price, investors in banks have no insight into the loss potential — they are hidden from view, along with the true financial condition of the company. This sort of accounting fuckery would never be tolerated in a nation where investors mattered more than insiders and bankers. Instead, it rewards the incompetent and allows near insolvent banks to pretend they are solvent, thereby allowing the granting of huge bonuses.
Almost three years later, we see the results of the Accounting Board’s move. The large bailed out banks remain weakened. Like all wounded animals, they are very dangerous. They have institutionalized fraud, made forgery a business expense. ZIRP exists for the primary reason of allowing these banks to rehabilitate their faulty balance sheets. Savers get punished.
The same could have been accomplished much more quickly and cheaply through prepackaged bankruptcies. That would have required an uncorrupted Congress, an honest Accounting board and a willingness to allow capitalism in America. Instead, we had foisted upon us a convoluted form of Socialism for Financiers.
If you want to know why the Fed has maintained zero interest rates, you need only look at who remains employed at banks, at who gets blamed for their failure. The record low approval rating of Congress at least imply that the public isn’t utterly blinded by the scam.
All to save the asses of a few reckless, incompetent bankers. Something is very, very wrong with this system…
This post originally appeared at The Big Picture and is posted with permission.