Thursday, July 23, 2009

Bloomberg's Weil on Proposed New FASB Mark-to-Market Initiative

by Calculated Risk on 7/23/2009 03:56:00 PM

From Jonathan Weil at Bloomberg: Accountants Gain Courage to Stand Up to Bankers (ht James, Michael)

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.
I'll believe it when I see it!

And on how this would apply to CIT:
[CIT] said in a footnote to its last annual report that its loans as of Dec. 31 were worth $8.3 billion less than its balance sheet showed. The difference was greater than CIT’s reported shareholder equity. That tells you the company probably was insolvent months ago, only its book value didn’t show it.
And for those looking for a market graph:

Stock Market Crashes Click on graph for larger image in new window.

This graph is from Doug Short of dshort.com (financial planner): "Four Bad Bears".

Note that the Great Depression crash is based on the DOW; the three others are for the S&P 500.