Banks Cry about their Fantasy Balance Sheets

Discussion in 'Wall St. News' started by Moc Yeah, Jun 4, 2009.


    Banks Try to Stiff-Arm New Rule
    Delay Sought in Accounting Change, as Investor Groups Plot Own Response

    The financial-services industry is taking steps to delay an accounting rule that would force banks and others to bring some of their off-balance-sheet vehicles back onto their books next year, which could force some to raise additional capital.

    A group that includes the Chamber of Commerce, the Mortgage Bankers Association, and the American Council of Life Insurers and others sent a letter on June 1 to Treasury Secretary Timothy Geithner, regarding the off-balance-sheet accounting-rule change, saying it should be adopted "cautiously and seek to minimize any chilling effect on our frozen credit markets."

    The letter was signed by 16 industry associations, many of which were part of a group known as the "Fair Value Coalition," which was formed earlier this year with the goal of changing mark-to-market accounting rules. Mark-to-market accounting rules set guidelines for banks on when they are required to reflect market prices in the values they assign to hard-to-value securities and other assets.

    An article in Wednesday's Wall Street Journal detailed how the group spent millions of dollars lobbying members of Congress on the issue, followed by a hearing in which the lawmakers pressured the Financial Accounting Standards Board to amend the mark to market rules.

    Now the group of financial organizations is trying to put the brakes on the off-balance-sheet accounting measure, which would force banks to bring hundreds of billions in assets back onto their balance sheets at the beginning of 2010, effectively forcing them to set aside more capital. Some accounting experts say they aren't surprised by the banking industry's latest effort. "Here we go again. They will get out their checkbooks and go to the Hill," says Lynn Turner, the Securities and Exchange Commission's former chief accountant.

    The rule would apply to existing off-balance-sheet entities, known as qualifying special purpose entities, which were generally used by banks to package and sell off to investors loans they had made.

    Investor groups Wednesday discussed in a call how to respond to banks' assault on mark-to-market accounting and the off-balance-sheet accounting measure. During the call, organized by the Center for Audit Quality, the group agreed to respond in a letter to lawmakers if a hearing to revisit the mark-to-market accounting rules is scheduled.

    The group, which included representatives from the CFA Institute Centre for Financial Market Integrity and FASB, among others, also talked about the banking industry's efforts to push back the off-balance-sheet accounting measure.

    Some banks have begun to estimate the impact on their balance sheet of the new rule, including J.P. Morgan Chase & Co., which said the rule would require it to consolidate $145 billion in assets when the rule goes into effect. Analysts don't expect that the bank, one of the healthiest in the industry, will need to raise capital because of the shift.

    The rule "includes securitization vehicles that played a large role in the bubble and allowed banks to operate with low levels of capital even though they had exposure to these assets that weren't on the balance sheet," says accounting analyst Robert Willens.