Zombie Government Armed with Accounting Tricks Bailed out Zombie Banking Industry
By Doug French
Nov 27, 2013
On March 16, 2009, the Financial Accounting Standards Board (FASB), a private-sector organization that establishes financial accounting and reporting standards in the US, turned the stock market around and at the same time motivated banks to become the worst slumlords and neighbors imaginable.
Most people believe accounting is conservative, the rules cut and dried. Accountants make economists look frivolous. But accountants are people too, and FASB succumbed to pressure from Capitol Hill in the wake of the 2008 financial crash.
How It All Started
The S&P 500 hit a devilish low of 666 on March 6, 2009. More major bank failures seemed a certainty. Somebody had to do something—and in stepped the accounting board prodded by the House Committee on Financial Services.
The board changed financial accounting standards 157, 124, and 115, allowing banks more discretion in reporting the value of mortgage-backed securities (MBS) held in their portfolios and losses on those securities. Floyd Norris reported at the time for the New York Times,
The change seems likely to allow banks to report higher profits by assuming that the securities are worth more than anyone is now willing to pay for them. But critics objected that the change could further damage the credibility of financial institutions by enabling them to avoid recognizing losses from bad loans they have made.
“With that discretion,” fund manager John Hussman writes, “banks could use cash-flow models (“mark-to-model”) or other methods (“mark-to-unicorn”).”