The FASB Rally: More Dishonest Breathing Room For Banks

The Dow finally topped 8,000 this morning for the first time since February. Good news for investors, especially owners of bank shares worried over whether hobbled institutions would survive under the weight of all those bad mortgage assets sitting on their books.

Bank shares are up because rule-setters just made it easier for banks to obscure the value of their toxic assets. The Financial Accounting Standards Board revised its rules to allow companies more leeway in determining "fair value" for assets on their books and reduced the threat of taking big charges against earnings on investment losses. That kicks in this quarter and can be applied to the first quarter as well. Banks will be allowed to largely define their own "orderly" strategy for winding up those bad assets, which likely means fewer writedowns on losses like those required under current mark-to-market standards. Ultimately, it equals breathing room for the big banks, higher share prices in the near-term, and not much else. Today's rally aside, bank solvency is still a question (OK, THE question).

Now however, that question is actually more obscure thanks to looser accounting practices, and that's why this latest fix that should inspire some public anger (and uncertainty among investors). Banks, which got into all this trouble by essentially making up values for huge piles of mortgage-related assets, are being bailed out by easier rules letting them set their own higher values on those very same assets now that they've been deemed (by the banks) to be worth too little in the present market.

In other words, banks are still able to tell the market what they're worth. That doesn't make their balance sheets any more believable.