Manipulating Bank Financial Statements

The post below this one spotlights a guy who is calling bank stocks a good buy. This post might convince you to never buy a single share of a bank ever again.

We are going to be dealing with a couple acronyms so let’s get them out of the way upfront. The first is IASB which stands for the International Accounting Standards Board. The second is FASB which stands for the Financial Accounting Standards Board. Both are independent agencies (supposedly) that set accounting standards. The IASB sets the standards for European companies and for a good part of the rest of the world as well. The FASB sets the standards for U.S. companies. Now to the issue.

It seems in October, pretty much under the radar, the IASB amended a rule that allowed European banks to turn losses into profits. What they did in essence was to allow banks operating under their standards to pick among their problem assets and claim that some of them had been on a different set of books when the financial crisis hit.

The results were dramatic. Deutsche Bankshifted $32 billion of troubled assets, turning a $970 million quarterly pretax loss into $120 million profit. And the securities markets were fooled, bidding Deutsche Bank’s shares up nearly 19 percent on Oct. 30, the day it made the startling announcement that it had turned an unexpected profit.

Now before you get too steamed, it’s important to note that they IASB was reacting to a change that the FASB made to its rules around the same time. The FASB told U.S. banks that they could use models instead of actual markets to mark their loans and securities to market in certain situations. Also, FASB rules allow banks in some cases to reclassify loans as essentially being held to maturity in which case they are valued at historical cost not market. The Europeans didn’t like this at all and felt it gave the U.S. banks a leg up.

Now here is where the controversy comes in. It seems that the European Commission told the “independent” IASB to amend its rules. Now if you aren’t shocked by this, the accounting industry is certainly professing to be.

The change has had dramatic consequences within the cloistered world of accounting, shattering the credibility of the IASB — the very body whose rules have been adopted by 113 countries and is supposed to become the global standard-setter, including for the United States, within a few years.

Sir David Tweedie, chairman of the IASB, acknowledged that the body needs more protection from political manipulation before it can claim that it has become the global gold standard.

Tweedie said he nearly resigned over the rule change demanded by European politicians. “I was so frustrated by the whole thing,” he said. “All the time when we are trying to build a global accounting system, and we are pretty close to it, and then suddenly out of left field this thing appears. It’s just absolutely exasperating.”

U.S. standards have been set by the Financial Accounting Standards Boardsince 1973. “Right now, there is no credibility,” said Robert Denham, chairman of the Financial Accounting Foundation, which oversees the FASB. “If we are going to have global accounting standards, my view is that is not going to work if the IASB is going to be jerked around by the European Commission. That is the very real risk that is posed by the EC coercion and the IASB’s response.”

I don’t suppose in the larger scheme of things that this is all that important. It’s been obvious for some time that bank financial statements are being pretty much manipulated to deliver whatever message might be necessary. Neither you or I have to put ourselves at risk by buying bank shares but that still leaves Ben Bernanke and his central banking brothers who have poured a ton of money into the sector and may not yet be done. Let’s hope that they have a set of books locked away in a vault somewhere that really does tell them what these institutions are worth.


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