Marked For Blood

Earlier today I talked about how banks were allowed to fudge the numbers on the value of their loans on their balance sheets to the tune of tens of billions of dollars. Turns out that the guys in charge of regulating that, the Financial Accounting Standard Board, wants to change the rules, imposing so called "mark-to-market" accounting on banks that would include these loan values.

Needless to say, the banks are fighting this with every last breath.

Mark to-market, or fair value accounting, requires companies to put market values on their financial assets. It is currently used for traded securities, such as stock holdings or real estate, but is not required for bank loans and other types of financial instruments that make up large portions of the balance sheets of banks.

The U.S. Financial Accounting Standards Board (FASB) is in the early stages of discussing a proposal that could require nearly all financial instruments to be recorded at market value on corporate balance sheets and recognize changes to those values in earnings. The FASB is expected to release a formal proposal, or "exposure draft," on the changes in the first half of 2010.

And the changes themselves wouldn't be implemented until 2011 at the earliest. That basically gives banks another 18-24 months or so to get their balance sheets in line. And in this economy, that's going to be very, very difficult.

Having to reassess their loan values would mean massive losses for the banks on the order of another financial crisis, hundreds of billions, perhaps trillions. The banks don't want to tell the truth about their assets.

"What the accounting boards are discussing now would be the biggest accounting change we've ever seen," Donna Fisher, the American Bankers Association's senior vice president of tax, accounting and financial management said in a statement Thursday.

The ABA said in the statement it was "deeply concerned" about the potential changes and that, while bankers have long supported mark-to-market accounting for assets that are "actively traded," they oppose its use for the traditional loans banks make.

Banks don't want to actually have to take the hit on their bad loans. What they do want is the taxpayer to keep fronting the tab for it, but the banks will never be solvent unless they are forced to be. Expect tremendous pressure on the FASB to fold on this, as well as on the international standards board as well.