Last Friday, the Federal Reserve announced it completed its so-called Fed stress test on 19 of the country’s largest banks. Improved financial health allows some banks to â€œincrease or restart dividend payments, buy back shares, or repay government capital.â€ The news was met by some mainstream media outlets with jubilation, even though the Fed did not disclose which banks did well and which banks did not.However, Wells Fargo, J.P. Morgan, U.S. Bancorp and BB&T were some of the banks that almost immediately announced dividend increases. The Fed said, â€œThe return of capital to shareholders under appropriate conditions is a step in the process of improvement in the financial sector and will help to promote banks’ long-term access to capital. Such access will support lending to consumers and businesses.â€ (Click here to read the complete Federal Reserve press release and report.)
Funny, I thought the bank bailout was supposed to encourage more lending. The dividend increases will fatten the paychecks of bank executives, but I don’t see lending taking off anytime soon. There was plenty of information about what went into the Fed assessment of the financial health of the banks, but â€œmark to market accountingâ€ was not mentioned one single time in any release or report I read from the Fed. â€œMark to market accountingâ€ is simply valuing an asset for what you can get for it today. It has been a standard method of accounting much of the 20th century, and it is how the IRS values assets.
Many of the 19 largest banks are sitting on possibly trillions of dollars of mortgage-backed securities (MBS) and underwater real estate. Because of an accounting rule change in April 2009 by the Financial Accounting Standards Board (FASB), â€œmark to market accountingâ€ is largely ignored. Banks can hold diminished assets on their books at whatever value they think they can get for them in the future. A FASB press release said, â€œUnder the current rules, unless the severity and duration of a drop in fair value is too great, if a company can assert that it intends and is able to hold a security until the fair value recovers, it need not record an impairment charge on the income statement.â€ (Click here to read the complete FASB release.) This accounting rule change makes banks look like they’re in much better shape than they really are. How many would be solvent, let alone be boosting dividends, if they had to write down toxic MBS and foreclosed property held at full value on their books? I am sure some banks would be insolvent if they used â€œmark to market accounting.â€
Economics professor and former bank regulator William Black thinks some institutions are insolvent now, like Bank of America. He wants B of A taken to receivership. B of A just announced 2 weeks ago that half of its 13.9 million mortgages are “bad.” Black also says the FASB rules are a â€œfarce.â€ Late last year, he co-wrote an Op-Ed piece in the Huffington Post that said, â€œThis accounting scam produces enormous fictional “income” and “capital” at the banks. The fictional income produces real bonuses to the CEOs that make them even wealthier. The fictional bank capital allows the regulators to evade their statutory duties under the Prompt Corrective Action (PCA) law to close the insolvent and failing banks. . . . We have made the CEOs of the largest financial firms – typically already among the 500 wealthiest Americans – even wealthier. We have rewarded fraud, incompetence, and venality by our most powerful elites.â€ (Click here to read the complete Huffington Post article.)
When I was listening to the Fed stress test coverage last Friday, I didn’t hear a single person bring up the enormous â€œmark to marketâ€ issue. One commentator opined that the Fed did not release the names or outline the problems at the weakest banks in their latest stress test. He also said it was probably so the banks could not â€œgame the system.â€ I say the system is already â€œgamed,â€ and the mainstream media and, apparently, the Federal Reserve are simply ignoring this glaring fact. Don’t think you will be hearing much about this story in the future. The day after the Fed stress test results were released, the U.S. shot 112 Tomahawk missiles into Libya and started a third war. That knocked discussion on this story right out of the news, but that was probably just a coincidence.
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