The Quick Way to Bank Profitability
If the roots of today’s financial crisis were economic in nature, the vital signs to monitor would be such financial measures as the stock market, unemployment levels, and interest rates.
However, a growing chorus of commentators believe that today’s dysfunctional financial system is ultimately a symptom of a political problem. As in, who makes the rules?
So, before investment banks could leverage their bets 35:1, the SEC had to give its ok; before AIG could write billions (trillions?) in exotic credit insurance, regulators had to look the other way; before Citigroup, Bank of America and others could bury hundreds of billions in liabilities in off-balance sheet entities, the Financial Accounting Standards Board (“FASB”) had to allow it.
As President Obama has said, the dirty little secret of today’s financial crisis isn’t how many laws were broken . . but how few.
“Does This Impress . . . Floyd Norris?”
So, have trillions in Wall Street losses and bad bets (so far) weakened bankers’ control over regulators? Hardly.
Here’s the latest from Floyd Norris, the chief financial correspondent of The New York Times — not just the unofficial dean of financial journalists, but as impeccable and unimpeachable a commentator as you’ll find anywhere:
The world of accounting rulemaking is normally a staid and slow-moving one, with the board offering detailed rationales for changes and giving interested parties months to comment on them. Most comment letters come from people well versed in the accounting literature, arguing points that can seem arcane even if they could have a major impact on financial reports.
The process this time has been different in almost every respect. The board allowed only 15 days for comments, and said it would act after taking just a day to review the comments. Those comments arrived by the hundreds, including bitter reactions from investors. “Market value is market value. Stop letting the financial industry call a duck a whale,” stated an e-mail message signed by Diane Walser. “Who will benefit?” asked Roy Bell. “Only the very ones who already broke all the rules and have brought destruction to the world as we know it.”
–Floyd Norris, “Banks Are Set to Receive More Leeway on Asset Values“; The New York Times (3/31/09)
Leaving all the arcane accounting aside, the basic issue is whether the banks must write down their assets to market value, or use more subjective criteria (their own). The latter approach has been called, deservedly, “mark to management.”
Suffice to say, the banks are prevailing.
The Tonight Show has a running bit, called “Does This Impress Ed Asner?,” in which amateurs perform kitschy routines to try to win Mr. Asner’s approval.
I propose my own version for the financial markets: “Does This Impress . . Floyd Norris?”
The banking industry’s latest trick — anything but the work of amateurs — decidedly does not (disgust is more like it).