The Great Bamboozle Perpetuated by the Financial Accounting Standards Board (FASB) and Wall Street

Yes, you, “Main Street,” have been bamboozled into believing that all is well with the “Too Big to Fail Financial Institutions.”  (Why do you think they are called “Too Big to Fail Institutions”?  There must be a reason.)  And, that reason is due to “Mark-to-Market” accounting, which went away in 2009.  Securities, such as mortgages, with exposure to interest rates are now defined as being “Available For Sale (AFS)” as per FAS 115, which in turn prevents any profits or losses from hitting the income statement even if they did impact retained earnings through the “Accumulated Other Comprehensive Income (AOCI) line.   In other words, as interest rates rise, prices of debt securities like mortgages will decline.  However, with the elimination of “Mark-to-Market” accounting, financial institutions do not have to reflect those losses as such.  Therefore, the financial position of those institutions will appear to be healthier that what they are. 

Case in point is Bank of America’s most recent quarterly financial report.  It reported a profit of $4.012 billion.  Well done, indeed! Not so fast, “Main Street.”  See, this is the great bamboozle.  That profit of $4,012 billion absent of “Mark-to-Market” accounting should have been a loss of $221 million.  (See the following Chart).  Oh, since the fourth quarter of 2011, Bank of America has effectively swept under the rug some $7.6 billion in cumulative losses, which are not losses only thanks to the demise of “Mark-to-Market.”