Summary
FASB responded ASAP to the demand by the House Financial Services Committee last Thrusday for immediate action to provide bankers relief from Mark to Market accounting. FASB has proposed guidance to allow banks to separate Credit risk from Liquidity risk in order to attenuate writedowns they might otherwise have to take on hard-to-value financial assets. An avowed purpose of the proposal is to close some of the gap between industry capital as stated by the regulators, which investors do not trust, and Tangible Net Equity, which banks contend entails an excessively severe markdown of assets banks claim they can hold to maturity. However, banks may not have sufficient capital, unless it is supplied by the government, to continue to hold these assets.
Analysis
This will sharpen the debate over the condition of the TBTF banks (C, BAC, WF, JPM) and large regional banks (PNC, STI, NTRS-WF claims it is a regional bank) and how much credit investors should give for the ability of banks to hold hard-to-value assets long enough to realize the cash flows attributable to them.
What is lost in the debate is that it is the banks that decided to invest in hard-to-value assets, and these assets should in fact be marketable in order to be counted as capital. So it is a bit disingenuous and beside the point for bankers to argue that the assets should not be marked down because of an ability to hold to maturity that itself depends upon the forbearance of indulgent regulators.
Federal Reserve Chairman Ben Bernanke recently expressed outrage that AIG managed to operate a huge hedge fund within its insurance platform. The TBTF banks, and even some regional banks, have done the same thing. The appropriate policy response would be to identify the hedge fund portion of these banks and sell it to hedge fund investors and trim these banks down to their basic deposit taking and lending functions, to be conduted under stringent supervision by regulators.
