FASB Grows A Pair? Watch Those Stocks!

It’s about time:

Now the FASB says it may expand the use of fair-market values on corporate income statements and balance sheets in ways it never has before. Even loans would have to be carried on the balance sheet at fair value, under a preliminary decision reached July 15. The board might decide whether to issue a formal proposal on the matter as soon as next month.

The impact of this would be tremendous.  As Jonathan has noted, this would have "caught" CIT in December, six months before they got "in trouble" according to the market, as their loan book was in fact "worth" enough less to wipe out shareholder equity in December!

Here’s the short and skinny:

The scope of the FASB’s initiative, which has received almost no attention in the press, is massive. All financial assets would have to be recorded at fair value on the balance sheet each quarter, under the board’s tentative plan.

This would mean an end to asset classifications such as held for investment, held to maturity and held for sale, along with their differing balance-sheet treatments. Most loans, for example, probably would be presented on the balance sheet at cost, with a line item below showing accumulated change in fair value, and then a net fair-value figure below that. For lenders, rule changes could mean faster recognition of loan losses, resulting in lower earnings and book values.

Financial truth?  You can bet this will be fought, but if they go through with it and also force consolidation of all SIVs and other off-balance-sheet games (allegedly due to go into effect at the end of the year) we’ll finally be able to read a balance sheet and come up with an accurate representation of the company’s finances.

This is being entirely ignored by the market, but it is a literal bombshell for every financially-connected company in The United States.  Forcing this disclosure (which should have always been policy and required) would expose the literal insolvency under fair-market value of hundreds of public companies right here and now, even with their stock prices flying to Mars.

We can only exit this recession and transition into durable economic growth when the debt in the system are recognized at their actual current economic value and cleared from the system, whether by sale at current value or bankruptcy of the holder. 

Should FASB implement this it will bring the truth out of the accounting closet.  That they’re actually seriously considering this will set up an interest fight with lawmakers who literally threatened to legislate fraud as an accounting standard this spring. Indeed, here’s the banking lobby’s view:

 “I guess the nicest thing I can say is it’s difficult to find the good in this,” Donna Fisher, the American Bankers Association’s tax and accounting director in Washington, told me.

That’s absolutely right – telling the truth is absolutely verboten if you’re in the banking industry, especially when the truth is that a huge percentage of your members – and perhaps all of your bigger ones – are, under actual market value rules, insolvent.