According to today’s Financial Times, “Tim Geithner warned on Sunday that the US government would consider ousting board members at American banks as a condition for giving the institutions “exceptional” assistance in the future.”
The next time I teach Econ 101, Economic Principles – Microeconomics, I will use this as a school book example of how not to structure incentives.
In my post of April 3, 2009 “How the FASB aids and abets obfuscation by wonky zombie banks”, I dumped on both the Financial Accounting Standards Board and on the International Accounting Standards Board for a second relaxation of mark-to-market valuation and accounting rules since the start of the crisis. I was wrong in including the IASB in the second installment of this roll call of members of the IAHS (the International Accounting Hall of Shame). The IASB did, in a statement on October 2, 2008, follow the lead of the FASB by allowing banks greater freedom to reclassify financial securities between the three categories of “held for trading”, ”available for sale” and “held to maturity”. However, it did not follow the FASB in the second surrender to the lobbyists of the zombie banks.
The Financial Accounting Standards Board (FASB), at its meeting on April 2, has once again relaxed mark-to-market accounting rules. This occurred after the House Financial Services Committee, a wholly owned subsidiary of the American Bankers Association, had, at hearings on March 12, 2009, effectively ordered the FASB to revise its guidance on fair value in inactive markets. The HFSC used the threat that, if the FASB were not sufficiently accommodating, Congress would legislate on the matter off its own bat to give the zombie banks what they wanted.
The FASB blinked and wimped under, as it had before. It made proposals less than a week after the House Financial Services Committee hearings. With some minor revisions, these proposals have now hardened into final guidance, despite protests from investor advocates and accounting-industry representatives, who argue that rigorously enforced mark-to-market rules force firms to reveal their least inaccurate picture of their true financial health.
Willem Buiter's blog ran until December 2009. This blog is no longer active but it remains open as an archive.
Professor of European Political Economy, London School of Economics and Political Science; former chief economist of the EBRD, former external member of the MPC; adviser to international organisations, governments, central banks and private financial institutions.
