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The AAO Weblog covers accounting issues and current events as they relate the practice of investment analysis.

 
 
Author: Jack Ciesielski Created: 10/13/2006 2:54 PM
The AAO Weblog is a weblog published by Jack Ciesielski , dealing with accounting issues and news topics related to investment and finance.

I doubt if there have been any more eagerly anticipated earnings in the last ten years than those of the big banks ever since they started their self-destruct process a couple years ago. First, everyone sweated over the loan loss allowances as housing and asset-backed securities slumped; then when firms had to start reporting the kind of fair value estimates employed - the Level 1, 2 and 3 hierarchy - everyone anticipated which bucket would be fullest. Now, the most hotly-anticipated bank figures is tangible common equity, in whatever form you decide to define it. It's kind of like pro forma earnings has always been, only maybe this is a pro forma lifeline measurement.

The concern of those doing instant analysis on 8-K earnings releases: how has TCE been ginned up by the FASB's new rules on fair value and other-than-temporary impairments? Hard to tell because firms don't have to say much about it in their earnings releases. We've done searches of the recent 8-Ks

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It's been a while, but Merle Hazard is always welcome when he shows up...

His latest CW riff is brief, but a good one: "I can't live in the real world, let's live in make-believe... so don't mark our love to market."

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The finest man I've ever encountered in business passed away Saturday - Lou Lowenstein.

Lou was teaching at Columbia Law School when I met him in 1992. His
writings in Barron's had always struck a chord with me, as well as his book "What's Wrong with Wall Street."

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Finally, the FASB held its long-anticipated meeting on the two FSPs that would have gutted fair value reporting as it exists. There's been more hoopla (and hope-la) about these two amendments than in all of March Madness.

Briefly, here's what transpired, as best as I could tell from the webcast of the meeting:

1. FSP 157-e,the proposal which would have provided a direct route to Level 3 modeling of fair values whenever there was a problem with quoted prices, will be quite different from the original plan. There will be indicators of inactive markets in the final FSP, but they'll only be indicators for a preparer to consider - and more importantly, their presence WILL NOT create a presumption of a distressed price for securities in question. That part of the proposal would have greased the skids for Level 3 modeling. Not now.

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I've sent my comments to FASB on their two proposals that will dilute fair value reporting. It will take a while before they actually make it to the FASB comment letter webpage, so I'm presenting both here as two separate blog posts on the off-chance that any readers might feel compelled to peck out a few comments to the FASB themselves - before the end of the comment period, April 1st. And that's no joke. This one relates to the OTTI idea, as you can tell from the title; the following post is my comment letter on the 157 modifications proposed.

 * * * * * * * * * * * * *

March 31, 2009

 

Mr. Russell Golden

FASB Technical Director

Financial Accounting Standards Board

P.O. Box 5116

Norwalk, CT 06856-5116

 

Re: No. FAS 115-a, FAS 124-a, and EITF 99-20-b, “Recognition and Presentation of Other-Than-Temporary Impairments”

 

Mr. Golden,

 

              I appreciate the opportunity to comment on this proposed Staff Position. As with the Proposed FSP No. FAS 157-e, I believe that this is a flawed proposal resulting from a flawed, though superficially rigorous, process. Though the FASB has met its due process requirements, I do not believe investors will be well-served by a hastily-developed FSP which so clumsily obscures impairment recognition. I repeat my remarks from my comment letter on the FAS 157-e proposal: this FSP will  create difficulties for the FASB’s long-term credibility as an independent standard setter. There is a nearly “Groundhog Day”- like sameness developing in the accounting standard world: at the end of the quarter, politicians acting in the interests of some of their constituents pressure either the IASB or the FASB to “do something” about an unfair standard, and a rapid-response amendment that weakens an existing standard is developed.

 

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director@fasb.orgI've sent my comments to FASB on their two proposals that will dilute fair value reporting. It will take a while before they actually make it to the FASB comment letter webpage, so I'm presenting both here as two separate blog posts on the off-chance that any readers might feel compelled to peck out a few comments to the FASB themselves - before the end of the comment period, April 1st. And that's no joke.

 * * * * * * * * * * * * *

March 31, 2009

 

Mr. Russell Golden

FASB Technical Director

Financial Accounting Standards Board

P.O. Box 5116

Norwalk, CT 06856-5116

 

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Happens frequently, these days.

On Friday, in reference to the FASB's rapid-response turnaround on the two recent proposed fair value FSPs, I bleated:

"They'll have one day to consider the comment letters they receive. How many other proposals have they floated with that kind of deliberation? I can't think of any."

Quick-witted reader Edith Orenstein of the FEI Financial Reporting Blog reminded me that, yes, there has been another time when the FASB moved this quickly.

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On Wednesday, acting Chief Accountant Jim Kroeker testified before the House Committee on Financial Services with regard to the progress being made by the FASB on "fixing" mark-to-market accounting. Some of the points he made are troubling in that they illustrate just how far - and how fast - the political interference in independent standard setting has gone. For example:

"... the FASB has acted diligently and responsively to use their expertise as an independent standard-setter and expose amendments to the measurement of securities in inactive markets and the recognition of "other-than-temporary" security impairments. Following the FASB due process procedures, the proposed amendments were deliberated fully at an open public meeting of the full Board, were approved by a majority vote, and are now subject to public comment."

They've acted responsively, for sure. But as an independent standard-setter? Hardly. Kroeker emphasized the following of due process in this escapade, but it can only be termed perfunctory at best. They'll have one day to consider the comment letters they receive. How many other proposals have they floated with that kind of deliberation? I can't think of any. Would "an independent standard-setter" conduct its affairs in such a fashion, in the face of a Congressional inquisition? I don't think so.

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After weeks of handing over the microphone to anyone who wants to bash mark-to-market accounting on its op-ed page, the Wall Street Journal decides a little equal time is in order. They handed over the mike to Mr. James Chanos, who provided an excellent analysis of the problems facing investors and the FASB at this pivotal moment in its history. From the editorial:

"The FASB and Securities and Exchange Commission (SEC) must stand firm in their respective efforts to ensure that investors get a true sense of the losses facing banks and investment firms. To be sure, we should work to make MTM accounting more precise, following, for example, the counsel of the President's Working Group on Financial Markets and the SEC's December 2008 recommendations for achieving greater clarity in valuation approaches.

Unfortunately, the FASB proposal on March 16 represents capitulation. It calls for "significant judgment" by banks in determining if a market or an asset is "inactive" and if a transaction is "distressed." This would give banks more discretion to throw out "quotes" and use valuation alternatives, including cash-flow estimates, to determine value in illiquid markets. In other words, it allows banks to substitute their own wishful-thinking judgments of value for market prices."

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Yesterday the FASB released two exposure drafts that tinker with the edges of fair value reporting. While the Board had planned several fair value improvements projects that encompassed one of them (guidance on determining whether a market for a security is active), the timing of these two projects is in direct response to the Congressional pressure brought to bear on the FASB last week when Congressman Kanjorski held an investigative hearing into mark-to-market accounting.

Talk about misplaced investigations: what needs to be investigated is why Congress listens so well to bankers and their lobby. Consider the bill sponsored by Representative Ed Perlmutter of Colorado - the "Federal Accounting Oversight Board Act of 2009." It fairly bristles with the kind of rewards the banking industry would love: better than bonuses, it could give them the kind of regulation they want. The bill would transfer the SEC's oversight of the FASB to the new "Federal Accounting Oversight Board." Look at its mission - it's a banker's dream come true:

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