As banks get accounting relief, some investors opt to sell
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As expected, accounting rulemakers today voted to give banks more discretion in how they value troubled assets such as mortgage-backed securities.
The change could give a quick boost to some banks’ earnings and, importantly, keep their balance sheets from eroding further.
Bank stocks initially rallied today, but have since faded -- even as the broader market holds on to hefty gains for the session. Wall Street has known since mid-March that the banks were likely to get relief on so-called mark-to-market accounting, so this may be classic case of “buy the rumor, sell the news.”
Either that, or some investors don’t like the idea of monkeying with accounting rules.
The BKX index of 24 major bank stocks was up as much as 6.1% early today, but at about 11:10 a.m. PDT was barely positive. The index is up 57% since March 6.
The decision by the Financial Accounting Standards Board will allow banks to use more latitude in determining a fair value for assets that are difficult to trade, which would include distressed mortgage securities.
Bankers have complained that mark-to-market rules have forced them to write down the value of some mortgage bonds to levels that were unrealistically grim.
Many in Congress sided with the banks, and have put heavy pressure on the FASB to alter the rules. The board obliged today.
From Bloomberg News:
The changes allow companies to use “significant” judgment when gauging the price of some investments on their books, including mortgage-backed securities. By letting banks use internal models instead of market prices and allowing them to take into account the cash flow of securities, FASB’s changes could raise bank industry earnings by 20%, according to Robert Willens, a former managing director at Lehman Bros. who runs his own tax and accounting advisory firm in New York. Companies weighed down by mortgage-backed securities, such as Citigroup, could cut their losses by 50% to 70%, said Richard Dietrich, an accounting professor at Ohio State University in Columbus. FASB rejected requests from banks to let them apply the fair-value change to their year-end financial statements for 2008. While the new standard takes effect for earnings reports filed at the end of June, FASB said companies could apply it to their first-quarter financial statements.
Critics of the rule change fear it will allow banks to engage in fantasy accounting that will obscure the true quality (or lack of quality) of their assets.
-- Tom Petruno