By Dave Lindorff

The accounting profession might seem like the last place that you’d
find serious political hanky-panky going on, and it’s probably not on
very many people’s A-list of fun subjects to read about, but the
Financial Accounting Standards Board, a quasi-governmental body that
has statutory authority to regulate and establish the rules by which
public companies, including banks, do their books, has just caved in to
pressure from those banks and from the large number of members of
Congress who pocket huge piles of campaign swag and perks from those
banks and other public companies, and gravely undermined the integrity
of corporate balance sheets.

This may sound incredibly arcane, but what the FASB has done is
declare that assets held by companies (including banks) on their books
will no longer have to be valued at their current market value. Under
new guidelines, effective retroactively to March 15, these assets can
now be valued at what the corporate managers think (or pretend to
think) they will be worth at some time in the future when they might
try to sell them.

Think about it for a minute. Say you own a house, which you might
have bought 10 years ago for $200,000, using a $180,000 mortgage.
Today, depending on where you live in the country, that house might be
worth as little as $100,000. If you still owe $100,000 on your
mortgage, that would give you a net worth of 0 (a lot more than what
Citibank and Bank of America are worth today). Now let’s say you want
to go out and buy a $20,000 car on credit. The auto dealer, before
extending you a car loan, will want to know what your net worth is.
Under market-to-market accounting rules, you would have to say that
your net worth is 0, and you probably wouldn’t get a loan—especially if
your employment, like that of many Americans, is iffy, and you’re
carrying a big balance on your credit cards. But under the new FASB
guidelines, if you were to be treated like a bank, you could estimate
the value of your house as $200,000 (the price you paid for it), or
perhaps even $250,000 (the price you “expect” it to get when you decide
to sell it). You have no real way of knowing whether your house will
ever return to being worth $200,000. For all you know, it could fall
further over the next five years to $75,000 or $50,000, but that
doesn’t matter. You, the owner, are saying that your “reasonable
expectation” is that this asset of yours is “worth” $200,000. And
bingo, thanks to the magic of modern FASB-approved accounting, your net
worth, instead of being 0, is now $100,000. You can buy your car.

This is what the FASB is now saying banks and other companies can do.

If you are an investor, or a potential investor, you now have to be
very wary. After all, how are you top establish what a company is
really worth, if the management is able to play games with the value of
its assets? The answer is you really can’t know. Things get much worse
when it comes specifically to banks, which after all, are all about the
assets.

Remember those “toxic” assets—the alphabet soup of debt products
with initials like CDO, CDS, SIV, all composed of diced and sliced debt
that for the most part is close to worthless? Well, thanks to the
FASB’s accommodating change in the rules, instead of valuing those debt
holdings (remember, loans are assets to a bank) at what they are worth
on the market today, the banks are now able to value them at what they
supposedly think they will be worth at some future date when the bank
might want to sell them. This is a wholly fictional figure, of course.
Nobody knows what, if anything, these crap debt instruments are going
to be worth, but it’s a fair bet that most of them won’t be worth any
more a decade hence than they are worth today (and maybe less). But who
cares? The important thing is that now the banks, who have huge black
holes in their balance sheets, can now fill those holes with
artificially inflated assets and make themselves look a whole lot
better financially than they really are.

There’s an irony here. The big banks that hold most of the toxic
debt (and especially the five largest banks that hold 96% of the
garbage) desperately wanted this FASB rule change because they wanted
to prettify their balance sheet in hopes of boosting their share values
and of maintaining the pretense that they are not zombies. But in doing
this, they are undermining a key goal of the Obama administration and
of Treasury Secretary Tim Geithner and Federal Reserve Chair Ben
Bernanke, who wanted to have the government and private investors start
buying those trillions of dollars’ worth of toxic assets off of the
banks’ hands.

Remember, if the banks declare that the toxic assets on their books
are worth some fictitious amount, they have to sell them at that price,
or stand accused of faking their books, i.e. fraud. But investors, like
hedge funds and other institutional investors, are not going to want to
buy those assets at anything but distressed bargain-basement prices,
because even with the government assuming 92 percent of the risk, they
are not going to buy these trash assets unless they see the chance for
a significant upside.

So with the new rule, the banks will end up being stuck holding the
very toxic assets that have sent them into a tailspin in the first
place.

The vote to end market-to-market accounting rules was controversial
even on the five-member FASB board, which ended up narrowly voting 3-2
in favor of the measure. One member who voted against the change,
Thomas Linsmeier, decried what he said was “pressure” on the board to
act. A House committee had threatened to introduce legislation that
would force the change if the FASB didn’t act on its own.

The US budget has long been a work of fiction. Now the books of the
nation’s banks and of many of its public companies will also be pure
works of fiction.

As columnist Jonathan Weil wrote in Bloomberg.com last month as the
FASB was considering making this change in its rules, “The FASB ought
to change its name to the Fraudulent Accounting Standards Board.”

The road to ruin, it turns out, is not paved with good intentions
after all. It is paved by powerful lobbyists buying short-term benefits
at the public’s expense.

By the way, if you think Citigroup is solvent, I have a great deal on a house for you.
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DAVE LINDORFF is a journalist based in Philadelphia. His latest
book is “The Case for Impeachment” (St. Martin’s Press, 2006). His work
is available at www.thiscantbehappening.net