Let's Play Pretend: Letting Banks 'Mark to Make-Believe'

Many of the problems presently facing the world financial system (and consequently the world economy as a whole) can be blamed squarely on the deregulation of American super-banks. Although it would be a somewhat hollow gesture, one of the primary pursuits of policy-makers probably should be to un-deregulate the U.S. banking system, and bring these super-destructive super-banks to heel.

Unfortunately, it seems that quite the opposite is going to happen. The Financial Accounting Standards Board has just untied one of the few remaining mooring lines holding these super-banks to reality. The change in policy means that banks will no longer need to mark their mortgage-backed securities to market values, but rather "value the securities instead at their value in a normal market."

The problem centres around this concept of a "normal market." Who defines what "normal" is, and how it is defined? We sincerely doubt the FASB will be defining "normal." The most likely definer is the super-banks themselves. These banks are not known for their, shall we say, sobriety. Simply put, the FASB has effectively allowed banks holding mortgage-backed securities to value them in their favourite manner: marked to make-believe.

If this isn't an invitation to cook the books, we don't know what is. Given the track record of these super-banks, we would be very surprised indeed if this new policy isn't thouroughly abused to the hilt. Now that the super-banks can call the value of their mortgage-backed securites whatever they wish, they can use them to effectively wipe out most (if not all) of their gambling debts. They will then appear much stronger (i.e. solvent) then they actually are, and thereby dig an even deeper grave for themselves, their customers, and their investors.