Welcome to Japan, folks.
You may have heard about FASB voting to amend their Rule 157 this week. If you're normal, your first thought was something along the lines of, "why is a group of accountants voting on a rule headline news?"
So here's what happened. Rule 157 mandated that companies value their assets based on what they would get if sold in the market (they call this mark-to-market). The problem is that a lot of financial firms have huge packages of debt that wouldn't sell for what they paid for it. This means that banks' balance sheets show them to be insolvent, and they have had to declare bankruptcy or beg for bailouts to make themselves solvent again.
Congress understands that people are tired of bailouts, so they've put incredible pressure on FASB to change the rule and let banks more-or-less declare the values themselves. So, banks balance sheets look better, and we can stop the bailouts, right?
Here's the problem no one wants to address. Those bad loans are still on the books and not improving much, with borrowers losing their jobs or walking away from underwater loans. They'll continue to eat the banks' money for years to come and divert money that would otherwise be let to companies that employ people. This is a big reason Japan has had a 20 year slump - the banks have been hanging on to these leech assets for years.
And that's just the known unintended consequence, what I wonder is how this will distort lending if banks try to double down on bad bets, whether better run banks will be dragged down by FDIC insurance payments to make up for the worse-tun ones, or if investors will stop lending to banks because they no longer trust the balance statements. In any case, it'll be interesting.
So here's what happened. Rule 157 mandated that companies value their assets based on what they would get if sold in the market (they call this mark-to-market). The problem is that a lot of financial firms have huge packages of debt that wouldn't sell for what they paid for it. This means that banks' balance sheets show them to be insolvent, and they have had to declare bankruptcy or beg for bailouts to make themselves solvent again.
Congress understands that people are tired of bailouts, so they've put incredible pressure on FASB to change the rule and let banks more-or-less declare the values themselves. So, banks balance sheets look better, and we can stop the bailouts, right?
Here's the problem no one wants to address. Those bad loans are still on the books and not improving much, with borrowers losing their jobs or walking away from underwater loans. They'll continue to eat the banks' money for years to come and divert money that would otherwise be let to companies that employ people. This is a big reason Japan has had a 20 year slump - the banks have been hanging on to these leech assets for years.
And that's just the known unintended consequence, what I wonder is how this will distort lending if banks try to double down on bad bets, whether better run banks will be dragged down by FDIC insurance payments to make up for the worse-tun ones, or if investors will stop lending to banks because they no longer trust the balance statements. In any case, it'll be interesting.