Repeating its blunder from the 1994 battle over stock options, the staid Financial Accounting Standards Board has buckled to political pressure demanding that it change accounting rules. The FASB voted Thursday to ease the interpretation of rules requiring banks and other big institutions to value their assets on a reasonable basis. See full story.
The value of the banks' assets is a huge issue for the global economy right now, because banks are required to have a certain amount of cushion to back up their loans. No cushion, no new lending.
Giving the banks more leeway in valuing their assets could boost earnings in the short run, but it inevitably will erode investors' faith that the banks' books reflect reality.
As home values sank and more mortgages went into default, much of the banks' capital cushion was revealed to be no more than hot air.
Easing the so-called mark-to-market rules is expected to boost bank earnings by 20% on average in the first quarter, analysts said. It also could make it less likely that banks will sell some of their assets at fire-sale prices to the public-private investment program, just established by Treasury Secretary Timothy Geithner.
The banks had a valid point in asking for some forbearance. Some of their assets were performing well each month, and surely are worth more than they can fetch on the open market today.
But by caving into pressure so quickly, the FASB has signaled that accounting standards are subject to the whims of the mob. That really means there are no standards at all, just interest groups.
Giving the banks more leeway in valuing their assets could boost earnings in the short run, but it inevitably will erode investors' faith that the banks' books reflect reality. If the banks want to attract new capital, they'll have to prove they can make money without having their pet legislator lean on the auditing board.
If the government thinks we need tougher regulations over financial firms -- and we surely do -- it will have to prove that it can recognize the difference between the public good and the interests of campaign donors.