It is being reported right now on CNBC, Bloomberg, CNN, Fox Business News and other US television financial networks that the US Financial Accounting Standards Board (FASB), responding to strong pressure applied by US lawmakers on Capitol Hill, has agreed to give auditors more flexibility in valuing illiquid mortgage assets that may have long-term value and strong cash flow. The agency is expected to approve the new guidance later today. Some commentators and critics are calling the rule change "accounting standards determined by mob rule," and " the only thing worse than bankers making up accounting rules is members of Congress making them up."
The new rules are expected to enable banks and financial institutions to boost (read lie, inflate, create a fascade to artificially increase) their operating profits when they report first-quarter results later this month. It alters so-called "mark-to-market" rules, which require banks and other corporations to assign a value to an asset, such as mortgage securities, based on the current market price for the security. This rule has serve industry and the business sectors very well over the past 30 to 40 years in that it requires any business holding financial or real assets to value those assets at "market values" when they report their periodic financial results.
Banks have complained they can't sell non-distressed assets because of a lack of a market. The measure allows corporations to use "significant judgment" when valuing these securities -- in other words, they can "estimate" the value based on cash flows on their balance sheets rather than using the value the asset would receive if sold immediately.
Guess what, if you are the "owners" or management of the bank whose income partly depend on the profitability of its operations, would you rather use a higher estimate or a lower estimate to value your "impaired and unsold assets" now that more flexibility is available for them to do so? I am afraid there will a lot less transparency in the financial markets (e.g. stock markets) for investors to make sound and reasonable investment decisions.
A really BAD MOVE for the markets indeed, but the markets are moving up this morning (NY time) with the stock prices of financials and banks rising significantly, and the price of gold plummeting as the price of crude oil jumps. At the same time, the US economy continues to disintegrate with a reported job loss of 742,000 in March, following a revised employment shrinkage of 706,000 in February this year, and factory order levels continue to drop year-on-year.
And, take note of this, home prices in 20 U.S. cities fell a record 19% in January from a year earlier... more than forecast and more than the 18.6% drop in December. And the sale of the marquee John Hancock Tower in Boston the other day (via auction) to Normandy Real Estate Partners indicates that all is not well with the US commercial real estate market. The same property, the tallest skyscraper in New England, was appraised for $1.3Billion in 2006 and traded for $935Million in 2003. This is VERY NEGATIVE for commercial real estate because it looks like even top quality assets are down 50% from their peak.
Despite U.S. commercial real estate prices having already fallen some 30% from their 2007 peak, hedge fund manager and billionaire investor and philantrophist George Soros believes they "have not yet fallen enough in value..."
"It is inevitable, it is written, everybody knows it, there are already some transactions which reflect and anticipate it, so we know, they will drop at least 30 percent (more)," Soros said in Washington, D.C. recently. When banks and insurance companies realize losses on their hundreds of billions of dollars in commercial real estate loans, they will get destroyed.
Read the following articles for additional information:
It's a MAD, MAD, MAD, MAD world out there! Have fun investing and take care not to lose your shirt! Who said the USA has the most transparent stock markets with the most level playing field in the world?