Regulator: Before Banks Collapsed, They Pleaded With Feds To Let Them Fudge Their Books

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March 13, 2009 06:47 PM

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Before financial institutions have collapsed over the past several months, they have come to the Financial Accounting Standards Board, pleading for a change in mark-to-market accounting rules so that they can continue to appear to be solvent on their balance sheets.

Robert Herz, head of the FASB, told a panel of lawmakers Thursday that the loudest critics of fair market accounting practices have been the very same banks that have gone belly up when regulators would not let them adjust their accounting.

"There seems to be a clamoring for changing mark-to-market rules that seems to come largely from institutions that may be insolvent," Rep. Alan Grayson (D-Fla.) said to Herz at a meeting of the Financial Services Subcommittee on Capital Markets, Insurance, and Government Sponsored Enterprises.

Grayson said that, from Herz' testimony, it seemed that "there may be institutions that are insolvent and they haven't been forced to write down their books to the point [of insolvency] yet, and those are maybe the same institutions that are asking us to modify the mark-to-market rules so that they won't have to admit that they're bankrupt. Is that correct?"

Herz said that it was.

"I share your point of view and I will tell you that I get calls and visits from some of those institutions that are now in government hands, about two weeks before they get taken over, trying to get the accounting changed," he said.

"Clearly some of the most vocal opponents of fair value and mark-to-market have been some of those institutions that ultimately failed and have had to have billions of taxpayer dollars put into them."

Mark-to-market accounting requires banks to value an asset at its most current market value. In a frozen market, where assets can't be sold for anything more than a fire-sale price, that value is extremely low, forcing banks to write-down a loss on their balance sheets. With a loss on the books, the bank can lend less money and is required to raise capital to meet regulatory lending standards. With enough losses on the books, the bank is no longer solvent.

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The exchange comes at about the 4:40 mark in this video:

Grayson, reached in Florida, said the he was grateful for Herz' candidness and insisted that changing mark-to-market accounting rules was no way to get out of the current economic mess.

"That's representative of exactly the kind of thing that's put us in this position in general," he said. "We have people who break every rule in the book and then they think that the answer to their problems is to break more rules. It's given us some real insight into the human nature and the pathology of the people who have created these problems for America."

Just as the the institutions Herz referred to were requesting accounting changes, large banks are again calling for modifications.

"Why are we having this conversation now at all?" Grayson asked. "I think the real reason this has come up now is because a lot of the institutions are genuinely insolvent and don't want to admit it. The people who are in charge of those institutions don't want to have to give up their multimillion-dollar jobs and turn companies over to receivers who will see all the mistakes they have made."

For Grayson, the rules exist for a reason. "The reason why we have these rules in the first place is to be able to distinguish the successful companies from companies that are broke. That's why we have these rules. That's why we have accounting," he said. "There's an underlying truth to accounting, and it's very important to preserve that truth."

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    It is obvious that the bailout bandits who are insolvent would want the rule changed.
    But now it is obvious that bailout-handout bandits (Fed, Treasury) are also on the same side!!

    tax-payers revolt is the only answer before all of tax-payers money is flushed down the toilet by this bailout-bandit team of bailout-takers and bailout-givers !!

        Favorite    Flag as abusive Posted 12:44 AM on 03/15/2009
    - Javida I'm a Fan of Javida 16 fans permalink

    Check out this CNN video about bank fees charged on debit cards for the unemployed:
    http://www.cnn.com/video/#/video/business/2006/07/05/lisovicz.ken.lay.death.affl

    These hucksters are merciless!!

        Favorite    Flag as abusive Posted 03:55 PM on 03/14/2009
    - jsgaetano I'm a Fan of jsgaetano 132 fans permalink
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    "That's representative of exactly the kind of thing that's put us in this position in general," he said. "We have people who break every rule in the book and then they think that the answer to their problems is to break more rules. It's given us some real insight into the human nature and the pathology of the people who have created these problems for America."

    In a nutshell, Mr. Grayson just described the primary difference because conservatives and liberals.

    Liberals believe those in power should follow the law... and conservatives believe those in power are there to change laws to suit their whims.

        Favorite    Flag as abusive Posted 03:29 PM on 03/14/2009
    - Liberal2 I'm a Fan of Liberal2 28 fans permalink

    Ummmm, one disagreement: "...The people who are in charge of those institutions don't want to have to give up their multimillion-dollar jobs and turn companies over to receivers who will see all the mistakes they have made..."

    No, they're not worried about their mistakes being uncovered, it's their outright criminal acts of fraud and theft.

        Favorite    Flag as abusive Posted 02:58 PM on 03/14/2009
    - Renee27 I'm a Fan of Renee27 12 fans permalink

    Yup. Hes right.

    Take a look at the Lone Star Transaction with Merrill Lynch

    http://www.youtube.com/watch?v=eZZkhSl8lMA

    Mark-to-model vs. mark-to-market

    http://www.youtube.com/watch?v=w_GZqhAR0I4

        Favorite    Flag as abusive Posted 02:52 PM on 03/14/2009
    - sonoffestus I'm a Fan of sonoffestus 30 fans permalink

    Heh, what's new about this kind of stuff? Big Biz goes to Washington cries a bit then the Feds tells them , I know its a mean tough world out there , you folks don't need to fund your employee's pension fund. Oh, and we'll help you set up and "sell' 401 k plans to your employees. Just another way for big biz to shirk their responsibilities toward their employees. I ran a small business for over 20 years, if I missed a monthly payment into our retirement fund the feds would would be all over us. Ask, any United Airline employee about their pension plan. Ask the pilot that landed his plane in the Hudson.
    These folks worked years for their pensions. UA restructures, the government takes over their pension and they get screwed. And there are other out there as well and more to come I would expect.
    it will never change as long as the dollars keep flowing into politicians pockets. And this is a two party problem.

        Favorite    Flag as abusive Posted 02:37 PM on 03/14/2009

    Our good President has used the term "lets not play the blame game" once in reference to the serious crimes committed by the people in the Bush Administration and then to the swindlers in the banking/financial corporations that stole trillions from people all over the world.
    I can understand why our good President is more interested in trying to apply all his time, energy and talents toward resolving the serious problems of a country in financial free fall and trying to get America back to work but as a brilliant constitutional lawyer Obama should know better when he suggests that our laws need not be applied to everyone in our society and particularly to the worst kinds of criminals.
    Lets be fair and logical about this "lets not play the blame game" and also apply it to the poor instead of just the rich and powerful since most of the poor are in jail for stealing a petty amount of money compared to those swindling CEOs.
    If Eric Holder our present U.S. Attorney General follows the lead of the one who appointed him and "lets not play the blame game" then Holder will be another Gonzales or Mulkasey over seeing the U.S. Department of Obstruction of Justice and we still won't have a country ruled by laws that apply to all her citizens and until this nation has laws that apply to all its citizens this country cannot be considered a republic.

        Favorite    Flag as abusive Posted 12:53 PM on 03/14/2009

    connie, here's my issue with Obama not willing to "play the blame game".....

    Before any problem can be fixed or corrected, you have to know what caused the problem. Without knowing what caused the problem - not the superficial cause, but the root cause of the problem, a proper solution cannot be crafted.

    It's kinda like a patient telling his doctor he is sick and the doctor prescribes a medicine without even looking at the patient or considering his symptoms -- because the doctor does not want to "play the blame game". Just doesn't work.

    Don't call it a "blame game".....call it "trying to identify the root cause of the problem so we can prescribe the correct medicine". Because that is exactly what is needed.

    Once the root causes are identified, people can be held accountable for any possible wrongdoing...which will be self-evident at that point.

        Favorite    Flag as abusive Posted 01:44 PM on 03/14/2009
    - Liberal2 I'm a Fan of Liberal2 28 fans permalink

    The problem is that the *ROOT PROBLEM* isn't financial. The problem that triggered the meltdown was the money flowing out ofthe economy to buy crude from other countries. The greed and fraud that is rampant on Wall Street simply made the crash steeper and deeper. Wall Street fraud and greed turned a bad American recession into a global collapse.

    We won't be able to dig our way out of this collapse because every time the global economy upticks, the price of crude will rise and erase that growth. In the great Depression. the US had enough oil, other raw materials, and manufacturing capacity that FDR's stimulus could work. In fact, the depression in the US ended when other countries began buying war materiel from us. That put thousands back to work.

        Favorite    Flag as abusive Posted 03:08 PM on 03/14/2009
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    You didn't really think the most colossal financial failure ever was just an incredibly unlucky set of coincidences, did you?

        Favorite    Flag as abusive Posted 11:27 AM on 03/14/2009
    - TremoluxMan I'm a Fan of TremoluxMan 28 fans permalink
    photo

    "Teacher, I don't like this 'F' on my report card. My Dad is gonna get mad. Can you lower the curve so I get a 'B' instead?"

        Favorite    Flag as abusive Posted 10:28 AM on 03/14/2009

    Great job of reporting, Ryan. Great job of oversight, Alan Grayson.

    If you want to further pursue this angle, Ryan (and Alan) you might speak with the Hedge Fund Paulson (as opposed to the Henry Paulson) - who testified to Congress some months ago - about that supposedly "frozen" market for distressed/toxic assets.

    The successful Hedge Fund Paulson has made clear that, contrary to the conventional bank-promoted wisdom, arms-length trading in such distressed financial instrument assets IS ongoing and possible. The real issue, he indicates, is that the "fair market" value of toxic assets in those current trades is lower than the threshold of pricing that the reckless, indebted investment houses obviously need to remain technically solvent.

    If Paulson (who ought to know) is correct that current pricing is not in fact being conducted at "fire-sale" levels, but simply at more realistic valuations in place of the borderline­-fraudulen­t face values of these instruments, by rights that should dramatically change the solution to this crisis. And CONGRESS should be the institution that changes it, Democratic and Republican Party campaign funding from Wall Street interests be damned.

        Favorite    Flag as abusive Posted 09:53 AM on 03/14/2009

    Typical. When normal people are in trouble its jail, debtors prison, high interest rates, underwater mortgages, harassing phone calls, foreclosures, repossessions, and "sorry sir, there is nothing I can do." When fat cat bankers and capitalists are in trouble, they have the arrogance to believe that they can just change the rules of the game or break them with impunity.

    That my friends, is what is so wrong with America.

        Favorite    Flag as abusive Posted 09:21 AM on 03/14/2009

    This topic is a little misunderstood. In many cases, the mark-to-market rules are causing unnecessary problems. Example: If an asset that I purchased at $100 can only be sold for $10 today, that doesn't mean that it can't be sold for $50 at some future point. The value of assets rises and falls routinely. A lot of the mortgage bundles contained viable assets that were tainted by a few bad ones. By forcing banks to write them off at the current value it created a crisis. Of course the banks were arguing against the rule, because they thought it was bad policy. More logical would be some kind of multi-year averaging. Would that allow some "walking dead" banks to keep trudging along? Maybe. But it would also have kept perfectly viable banks from going under just because there is a current -- and likely temporary -- state of panic about their assets.

        Favorite    Flag as abusive Posted 08:57 AM on 03/14/2009
    - pros54 I'm a Fan of pros54 4 fans permalink

    In the same way stocks that sell for 50cents today could appreciate to $200 dollars some day in the future and going as you suggest should we average it out? My beef is that since my property value has fallen why is my property tax still based on the bloated prior valuation?

        Favorite    Flag as abusive Posted 01:13 PM on 03/14/2009

    "A lot of the mortgage bundles contained viable assets that were tainted by a few bad ones. By forcing banks to write them off at the current value it created a crisis."

    jeff, you clearly misunderstand mark-to-market accounting principles. Valuing mortgage bundles ALWAYS takes into account all of the assets within that bundle. Such valuations routinely assess the percentage of the "bad ones" and the effect of the "bad ones" on the total bundle value. So the mark-to-market valuation makes full consideration of the entire universe of assets within that bundle. So your basic assumption is substantially incorrect.

    Now if you can point out cases where mortgage bundles are valued without regard to the quality of the individual mortgages contained within, then the entire valuation system for that bundle -- and any other bundles that utilized that same valuation method -- is not only deeply flawed, but probably criminal. Either way, it is not the mark-to-market principle that is flawed, it is the calculation of the bundles that is flawed/criminal.

        Favorite    Flag as abusive Posted 01:33 PM on 03/14/2009
    - Liberal2 I'm a Fan of Liberal2 28 fans permalink

    Moody's and other raters never measured actual risk of the mortgage derived securities because the *SELLER* gave them a percentage. That's why mortgage brokers and S&L gave mortgages to anyone who walked in: they knew the MDS would be rated triple A and sold to an investment bank.

        Favorite    Flag as abusive Posted 03:15 PM on 03/14/2009

    Part #2, continued comments:

    Another point about mark-to-market valuations: if you hold assets to maturity, as stated in your investment policy, you do not have to routinely mark-to-market their values. Conversely, if you hold assets for trading, as stated in your investment policy, you must routinely mark-to-market. And you absolutely cannot flip-flop between holding an asset for trading and then re-designate that asset as a portfolio investment. You can get away with changing that status once, but more than once and you are in deep shite.

    This is the way the rules are written, and were written long before any of the current actors got into the game. So they got into this game knowing what the rules are...and only want to change the rules once they phucked everything up.

    One final thought - once a bank becomes a walking dead...Zombie, it is truly a dangerous animal. Because it is now in a position where it has nothing to lose. I had first hand experience as a Federal banking regulator during the S&L Crisis years, when zombie S&Ls were allowed to continue their dead walks. Nothing...and I mean NOTHING good came out of any of those zombie S&Ls. In fact, once they became Zombie S&Ls, their problems increased geometrically and much criminal activity resulted.

        Favorite    Flag as abusive Posted 01:34 PM on 03/14/2009
    - zedhed I'm a Fan of zedhed permalink

    exactly

        Favorite    Flag as abusive Posted 08:38 AM on 03/14/2009
    - denny8844 I'm a Fan of denny8844 3 fans permalink

    there is no question many large banks are insolvent. The only question is how many and how much is it going to cost all of us to ensure that the contagion doesnt bring down the entire financial system. do you all have survival gear? I have my pup tent and am stocking up on granola bars

        Favorite    Flag as abusive Posted 08:16 AM on 03/14/2009
    - bbriani3842 I'm a Fan of bbriani3842 4 fans permalink
    photo

    Got a garden going, bought two more propane tanks, purchased a pressure canner and 4 dozen Mason jars. . .

    Items to get/build:

    8500 watt generator
    5 large boxes of powdered milk
    4 12v sealed lead acid batteries
    solar oven
    solar panels to recharge the battery on the e-bike

    I think we'll be ready for the time being. . .

        Favorite    Flag as abusive Posted 08:52 AM on 03/14/2009
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    Makes you stop and wonder about the supposed "Profitability" statements of both Bank of America and Citibank this past week doesn't ?

        Favorite    Flag as abusive Posted 07:39 AM on 03/14/2009
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