Thursday, April 2, 2009

FASB Folds

The Federal Accounting Standards Board (FASB) repealed the mark to market rule today. Wall St loved it, The Dow jumped better than 200 points, and nearly broke thru 8000. Abandoning mark to market means banks can carry worthless (nobody will buy them) assets at the price they paid for them. Presto, chango, zillions of dollars worth of mortgage backed securities can now be carried at what ever the bank wants to call their value, rather than their true market value. Toxic assets just got fumigated.
Remind me never to buy stock in any financial institution.
Big question. Will the banks believe the new plumper balance sheets? The banks have been whining since September that nobody will loan to them. Probably because everybody with money to loan fears the bank will go broke before they get their loan paid back. The fears, fueled by things like Lehman, center around the question of how much money does Bank X have in the vault to pay off depositors who make withdrawals. By law the bank is supposed to have 10% of depositors funds in the vault, preferable in cash. Due to continued bank whining over the years, the requirement for cash has been weakened, and "liquid assets", say mortgage backed securities and credit default swaps, now count as reserves. If a bank fails to pay out cash to depositors upon demand, it's broke. Word gets around and all the depositors run down to the bank and withdraw every penny, that is fatal to banks. Lenders to banks are worried that the bank might go poof just about any time.
Knowing that the bank reserves can be largely toxic unsellable assets isn't going to calm nervous lenders. Who probably won't lend.

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