Americans have been told that banks are returning to health, that the financial crisis has passed the darkest of days, and everyone can go about their business as usual.
But are banks really healthy? Unfortunately we are not able to know the truth because when the Financial Accounting Standards Board (FASB) changed the rules that govern how financial institutions record asset values on their books to a model that essentially allows them to mark assets to a model that has been dubbed ‘mark to make believe‘ we can not properly gauge their financial condition.
When accounting rules are changed in the middle of the crisis, as was the case with FASB allowing the financial institutions to record assets on the books at values that are likely much higher then the open market would provide it creates an un-level playing field as it is no longer possible to compare apples to apples.
In other words, if bank (you pick a name) is holding a certain pool of mortgages on their books they are essentially allowed to value those assets on what they believe will be a future value, not what they are ‘really’ worth if they were sold today.
Before the housing bubble blew up the banks and other financial institutions were very happy to be reporting the value of these assets at ‘mark to market’ values because prices were rising so quickly. But the banks sang a different tune when said assets began to decline in value. All of a sudden the banks did not like the accounting rules anymore. They liked ‘mark to market’ valuation methods on the way up, but when the housing market began to crumble they suddenly wanted new rules, and they got them.
Why was it so important that the banks and other financial institutions get the rules changed? Simple, if these institutions had to keep reporting their assets at current market valuations then they would be forced to report substantial losses. And in many cases reveal that the institution is insolvent.
In early 2009 the bank lobbyists twisted the arm of Congress, and with the help of then Treasury Secretary Hank Paulson persuaded the Financial Accounting Standards Board to relax the ‘mark to market’ accounting rules. Under the modified rule adopted in April of 2009 the banks could elevate the values of their holdings to a model based on a perceived future value, thus hiding the fact that they could be technically insolvent if they were following the same market valuation methods when prices were going up.
Don’t you wish you could balance your checkbook the same way banks are allowed to now?
When banks applied for emergency funding under the TARP program there was a requirement that the banks had to make periodic dividend payments back to the Treasury while the bank held the TARP monies. Today we learn that an increasing number of these banks who have yet to pay back the TARP money are falling behind in their requirements to pay the government.
More than 90 U.S. banks and thrifts missed making a May 17 payment to the U.S. government under its main bank bailout program, signaling a rising number of lenders are struggling to meet their obligations.
The statistics, compiled by SNL Financial from U.S. Treasury data, showed 91 banks and thrifts skipped the May dividend payment under the Troubled Asset Relief Program, or TARP. It was the first missed payment for 23 of the banks; for the others, it was at least their second miss.
The number of banks missing their TARP payments rose for the third straight quarter. In February, 74 banks deferred their payments; 55 deferred last November.
SNL Financial’s analysis found 20 banks have missed four or more payments since the program began in 2008, while eight banks have missed five payments.
Under the TARP program, the U.S. Treasury invested in preferred shares issued banks looking for funds. The banks were to make regular dividend payments to the Treasury {…} (Source: Ruters/CNBC)
With the number of institutions unable to make the required payments what does that say about the so called ‘all is well’ government proclamation?
