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Bank stocks were boosted on Thursday by an accounting rule change that is expected to allow managers to repair balance sheets by recalculating the value of some of their most troubled assets.
The Financial Accounting Standards Board voted on Thursday morning to allow banks more freedom to use their own valuation models, rather than current market prices, for assets where markets have become illiquid. A second rule change means banks will only have to recognise a part of any impairment in their profits.
In depth: US banks - Dec-12
Editorial: Revising the rules - Apr-01
FT Interview: Josef Ackermann - Apr-01
Letter: Dutch securities regulator on dangers of political meddling - Apr-02
Citigroup jumped 9 per cent in early trading, Wells Fargo was up almost 11 per cent and Bank of America added almost 10 per cent
Some analysts have calculated that the change could allow a profits boost of up to 20 per cent in the quarterly earnings of some banks.
Investors take a different view, saying that more flexibility with the rules would let big banks hide the real value of their toxic assets.
DARK DAY FOR SOME
Robert Willens, an analyst who specializes in tax and accounting issues, said the changes will help banks cosmetically and increase their capital levels.
"Yet I'm finding the investors I speak to are mostly disappointed because it doesn't change the reality of the banks," he said. "This may end up being a dark day in history before it's all said and done. It's a pyrrhic victory."
For the above mentioned reasons, by banning marked to market you can fully expect the banks to start churning out a couple of profitable quarters. The pundits will proclaim the recovery is on, which is really the ultimate goal of the government. Markets will rally and Obama will say I told you so. Then there’s people like you and me who recognize it for what it is and take this opportunity to profit. This false rally will be a great time to get short the financials.
I'm pretty sure that the politically motivated FASB rule change is simply a way to help crooks continue to be crooks. Given the experiences of the past 18 months, I don't see how any thoughtfull person could believe different.