Banks And The Cowardliness Of Accounting

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If you don’t like the game, change the rules. At least that is what the nation’s banks would like to have happen. They are making the case that if accounting practices were "correct", they would not have had to take all of those losses for their remarkably poor risk management.

The argument is simple. If Draconian GAAP measures to value bank assets had been more "accurate", much of that red ink could have been avoided. Perhaps banks would not have had to raise so much money. Perhaps the government bailout could have been avoided altogether.

According to Reuters, "Fair value accounting, which requires assets to be valued at market prices, has been blamed for billions of dollars in writedowns by some U.S. banks and policymakers." Since some toxic assets do not trade, computer models are used to decide their value.

While the models may not be perfect, it is unlikely that all accountants for all banks set up such flawed systems for valuing assets that the entire process was corrupted with judgments which were so remarkably poor that the prices set for mortgage-backed securities was off by any significant amount.

The real intent of the desire of banks to change the way their balance sheets have been evaluated is they would like their CFOs to have more say in the valuation. Management’s opinions should count for more. Self-serving behavior should be allowed to be part of the weighing and accounting.

The call for reform is a call for magic. Men with unusual powers can take away the pain of bank losses. The increase in mortgage defaults can be made less onerous. Capital can be preserved. So can management bonuses.

Why should anyone be held accountable? The whole mortgage-backed write-off system was one big mistake, a nightmare that will go away in the morning.

Douglas A. McIntyre