Tuesday, March 17, 2009

When All Else Fails, Just Change the Rules For Banks

The Fed announced a two-year delay of new capital requirements for bank holding companies that otherwise would have gone into effect later this month.  The new rule would've required bank holding companies to deduct goodwill (i.e. meaningless accounting plug) from the sum of core capital elements in calculating the amount of restricted capital that would be included in Tier 1 capital.  Furthermore, bank holding companies can continue to include cumulative perpetual preferred stock and trust preferred securities in Tier 1 capital up to 25% of total core capital elements.

In other let's-just-change-some-rules-to-keep-our-banks-solvent news, FASB is proposing changes to mark-to-market policies.  The proposed changes would allow companies to use "significant judgment" in valuing assets.  Some might argue that it was a significant lack of judgement that got us into this mess, but apparently judgement has improved significantly in the past year so that we can trust the clowns marking the books.  Companies would be able to apply the revised rule to their first-quarter financial statements.  FASB will be voting on the proposal April 2nd.  This might explain why all the bank CEOs have come out with such bullish assessments of their "profitability."  If you get to make up your own valuations, then profits are easy to come by.  I'm not sure when the last time was that the ostrich strategy worked for anyone, but maybe someone can call Japan as see how it served them in the '90's?     

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