Banks want to bury their toxic waste

If you think HR-speak is bad, Finance-speak is just as impenetrable to the uninitiated and it creates even more scope for pulling the wool over people’s eyes. The trouble is that most of us stop listening as soon as we hear financial jargon. Even intelligent chaps like Boris Johnson find themselves losing the battle to stay awake:

Try as I might I could not look at an overhead projection of a growth-profit matrix and stay conscious.

Unscrupulous finance professionals, I’m sure, use this to deadly advantage, hoping we won’t notice some of their more monstrous proposals.

Take this, from an article in the Financial Times:

The world’s leading banks have stepped up pressure to relax controversial accounting rules with a new plan aimed at breaking the “downward spiral” of huge writedowns, emergency fundraisings and fire-sales of assets.

The proposals on “fair value” accounting by the Institute of International Finance, an alliance of 300-plus companies chaired by Josef Ackermann, Deutsche Bank’s chairman, would enable financial companies to cushion the blow of financial crises by valuing illiquid assets using historical, rather than market, prices.

Those of you who didn’t stop reading after the first line may, perhaps, think this all sounds very reasonable. After all, I’m sure we’re all in favour of fair value accounting.

But when you translate it into plain English, the real intent becomes clear. A “writedown” is what normal people call a loss. In the case of the banks lobbying for this accounting change, a sodding great big loss caused by over-investment in sub-prime mortgage debt. And “valuing illiquid assets using historical, rather than market, prices” means pretending that this pile of crap is still worth what you paid for it, even though you couldn’t sell it for a fraction of that today.

Perhaps we could all work under these new rules. When I next trash my car, I could go the the insurance company, tell them it was still worth what I bought it for and demand that they pay out the full whack. We could all keep borrowing money against the value of what our houses cost two years ago. If we pretend things are still worth what they were, we could carry on with the cheap money and credit party for another couple of years until it all comes crashing around our ears again.

The article continues:

The IIF’s proposals, which were sent to US and European central banks, governments and accounting watchdogs, underline financial groups’ view that the credit crunch will inflict long-lasting damage on their business.

Erm…, remind me, who was it that caused the credit crunch again? If anyone deserves to have long-term damage inflicted on them surely it is the muppets who got us into this mess in the first place. Instead, though, they want to change the rules to make it look as if they haven’t made losses at all.

Ian Mackintosh, chairman of the UK’s Accounting Standards Board, is not impressed. As he explains:

One recurring suggestion is that the International Accounting Standards Board should make it easier for a company to move its financial instruments from the “available for sale” category to the “held to maturity” category.

Instruments held to maturity do not have to be fairly valued and thus, so the theory goes, the volatility could be “parked” while the market sorts itself out and returns to normality. However, this would artificially, and with great discretion on the part of the management, hide what is an economic reality.

Again, a translation into plain English; “the volatility could be “parked” while the market sorts itself out and returns to normality” – in other words, you can hide the bad debts and pretend they are still worth what you paid for them, thus not hammering the value of your company, until the markets conditions improve and you can bring them out of hiding and sell them for a better price. By the time that happens, of course, most of the people currently running the banks will have retired. No wonder they are so keen on this idea.

And “this would artificially, and with great discretion on the part of the management, hide what is an economic reality”. Remember, Ian Mackintosh is a polite accountant so he can’t really say “this would give bank executives carte-blanche to lie through their teeth about the huge losses they have made”, but that’s what this suggestion amounts to.

This proposal is the banking equivalent of burying nuclear waste for a future generation to inherit. It is yet another attempt by those who caused the credit crunch to hide from the consequences of their actions. The IIF’s plan should be stamped on and those who made the mistakes should be left to deal with the poison leaking out of their balance-sheets. 

The good news is that the regulators seem have a similar opinion.

[A]ccounting standard-setters in the US and Europe so far resisted pressure to relax fair value rules. Other regulators have also criticised financial companies for proposing rule changes that would reduce the impact of a crisis triggered in large part by their aggressive lending and underwriting practices. The IIF declined to comment.

Yeah, I bet they did.

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