It all started on March 16, 2009 when FASB proposed that companies use more flexibility in valuing their assets under "mark-to-market" accounting. A move that financial institutions said would ease balance-sheet pressures many were feeling during the economic crisis of the subprime debacle. On April 2, 2009, after a 15-day public comment period, FASB eased the mark-to-market rules. Financial institutions are still required by the rules to mark transactions to market prices but more so in a steady market and less so when the market is inactive. In other words, companies, especially financial institutions, can do whatever they like. Today, you cannot trust any balance sheet given to you today. (One reason why I am a technical analyst, not a fundamental analyst.) It is really that simple. The reason is that the government demanded that FASB allow these lies as a business practice when it comes to the alleged value of securities.
Then, on April 9, 2009, FASB issued the official update to FAS 157 that eases the mark-to-market rules when the market is unsteady or inactive. Early adopters were allowed to apply the ruling as of March 15, 2009, and the rest as of June 15, 2009. It was anticipated that these changes could significantly boost banks' statements of earnings and allow them to defer reporting losses. The changes, however, affected accounting standards applicable to a broad range of derivatives, not just banks holding mortgage-backed securities.
Opponents argue that the implications for investors are that the valuation of assets underlying such securities will be increasingly difficult to analyze, not less so. An example would be determining a company's actual assets, equity and earnings, which will be overstated if the assets are not allowed to be marked down appropriately.
As expected today (October 27, 2011), here is ISDA with the most farcical of decisions, similar to FASB in 2009. From Reuters: "A new voluntary deal for holders of Greek debt to accept deeper losses is unlikely to trigger a 'credit event' that would cause a payout on default insurance (CDS), said a top lawyer at the International Swaps and Derivatives Association. Greek bondholders face losses of 50 % under a plan to lower the country's debt burden and contain the euro zone's long-running debt crisis. The aim is to complete negotiations on the package by the end of the year. But because participation in the deal is voluntary rather than forced, it would typically not trigger payment on CDS contracts."
And now we have MF Global (October 31, 2011), who is missing something like a billion dollars of client funds. Or, should I simply say that MF Global stole its clients’ funds, which is exactly what happened. Once again, where are the regulators? MF Global was not just your common “Ma and Pa Brokerage Company.” It was a “Primary Government Security Dealer,” who is supposed to have unquestionable financial strength. By the way, I thought Dodd-Frank was supposed to put in place checks and balances to stop this type of activity. And, then there is Sarbanes Oxley. There have been multiple bank failures by public companies that filed balance sheets under penalty of criminal prosecution just weeks before they failed. These banks had balance sheets that showed perfectly, healthy institutions. The FDIC has documented dozens of bank failures, privately-held and publicly-traded, where those balance sheets were proven to be factually false, as the losses have been 20%, 30%, 40% or even more just a few weeks later. It is beyond comprehension that the assets in question could have actually lost 30% or 40% of their value within that period of time. The only explanation is that these financial statements were indeed falsified. Sarbanes-Oxley makes this a criminal matter. Where are the indictments against the CEOs of these institutions? (Sources: Market-Ticker and Wall Street Journal)
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