Last week American banks found a sleazy way to look better on paper. Instead of improving performance, they changed the way they keep score.
The heart of the matter is how financial institutions report the value of securities their vaults. Mutual funds “mark their portfolios to market;” that is, they tote up the value of their securities using the prices investors are willing to pay for them. Banks don’t have to do that. They convinced Congress, that in turn pressured the Financial Standards Accounting Board (FASB), that they should not have to report their bad bets if their decline in value is “temporary.”
Who decides whether a bank’s investment decline is temporary? The management of the bank, of course.
When it comes to financial reporting, transparency is good. Carrying assets on your balance sheet at values no one is willing to pay for them clouds the picture. Relying on the judgment of bank executives to determine when to do that is ridiculous; they have a built-in conflict of interest.
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