Summary
Because the financial crisis is the most controversial issue now and likely to remain so indefinitely, the question of how assets are valued on the books of large financial institutions is of great importance. Hundreds of billions of dollars has alread been spent on a number of programs designed to aid troubled banks by injecting funds into them, and the authorities have vowed to implement the original purpose of the rescue program, which is to buy troubled assets. For many years, the banking industry has insisted on wide latitude in the valuation of securities and other assets that have declined in value during the crisis. As values have declined, the demands for relief from Mark to Market rules have become more shrill. Lately bankers have proposed that Congress empower the Federal Reserve to change the accounting rules, on the ground that the other agencies with jurisdiction have refusted to provide relief. Chairman Bernanke's words did not totally dispel this notion.
Analysis
At recent hearings before the House Financial Services Committee, CEOs of C, JPM, BAC, and WF testified that their banks are well capitalized and making money. Fed Chairman Bernanke has testified that these banks have valuable franchises that need to be maintained.
However, the performance of the stocks of these companies suggests, at a minimum, confusion as to their value, and much of this confusion revolves around the tangible capital of the banks, as opposed to their regulatory capital.
At an SEC roundtable last year, former FDIC Chairman Bill Isaac blamed the accounting rules for the destruction of values in the financial sector, and he lamented that it was the market, not the regulators, that forced the sale of WAMU and Wachovia. At another SEC meeting, a top Citi accountant declared that the bank believes in using accounting to achieve favorable business, legal, or accounting results, and any who would object had better get used to this.
At a hearing before the Senate Banking Committee yesterday, Damon Silvers, vice chairman of the TARP Oversight Panel, testified that he expects the recovery of house prices to take as long as the ten years it took for values to recover after the real estate bust in the late eighties and early nineties. If this is true, then even if the banks were to hold assets to maturity, their net present values have declined.
The regulators have largely caused the current crisis by permitting the largest banks to expose themselves to greater and greater risks through derivatives and structured securities while failing to intervene to ensure that bank capital was sufficient to protect the interests of depositors and taxpayers.
The last thing the economy needs now is to compound the confusion over asset values by suspending valuation rules at the behest of banks that made bad investments. Bankers will continue to seek such relief, Chairman Frank supports it, but in the end, the leadership of the Senate Banking Committee can be counted upon to hold the line.
