Ali Hasan calls bankers crooks and supports their anti-mark-to market accounting games

Ali Hasan, a film maker who is running for Colorado Treasurer, is charging that Treasurer Cary Kennedy, a Democrat, has invested in what he calls bailout banks. And he frequently wonders why the bankers who took Troubled Asset Relief Program (TARP) funds under pressure from the government aren’t in jail. He thinks that bankers who make bad decisions are crooks, which makes no sense. Under that logic, anybody who makes a mistake is a crook.

Yet, in a speech this morning to 

the Arapahoe County Republican Men’s Club, Hasan said he approves of changes in accounting rules that were made last year to reduce requirements that banks use mark-to-market accounting. When banks don’t have to use mark-to-market accounting, the government protects banks from having to report losses on troubled assets, mostly under water mortgage investments. What the candidate for the GOP’s nomination for Treasurer is saying is that he backs the game playing that got banks into trouble in the first place.

In effect, he’s saying that it’s alright for issuers of the bonds that state Treasurer invests in to sweep their troubled assets under the rug so that they can inflate their stocks and credit ratings. That’s what they’re doing now that they’re no longer required to mark their assets to market. As wsj.com reported April 3, 2009 in these impact graphs:

U.S. accounting rule makers made it easier for banks to limit losses, but in an unexpected move they bowed to critics and backtracked on one proposal that would have let companies ignore market prices in some cases.

The vote by the Financial Accounting Standards Board followed a debate in which members of Congress pushed for steps to help banks weighed down by troubled assets, while some investor groups warned that the plans would allow executives to cover up losses. The rules change spurred Thursday’s stock-market rally.

For the most part, the board ratified proposals it had put out for comment two weeks earlier, including changes that would lessen the need for banks to take an earnings hit when assets run into trouble. Financial stocks led the market up in the morning on the expectation that the rules would be approved, but faded and ended roughly on a par with the broader market.

Bankers argue that the “mark-to-market” principle of valuing assets at market prices is sometimes flawed because markets have ceased to function. They say that can lead to unnecessary alarm about the financial system’s stability, an argument lawmakers have echoed.

One member of the five-member accounting standards board tried to address criticisms that the body had bowed to political pressure.

“We are an independent standard setter and it’s important that we maintain our independence,” said Lawrence Smith. But he said the board can’t “ignore what’s going on around us” as banks plead for help.

Under one of the changes adopted Thursday, the definition of an asset that is “other than temporarily impaired” will change. Once an asset gets that designation, it triggers a write-down in value that feeds through to the bottom line. In the case of banks, that may put capital below regulatory requirements.

And here are the killer graphs for the anti-mark-to-market bankers and their supporters:

Currently, to avoid the designation, management must assert that it has the intent and ability to hold on to the asset until its value recovers. Under the new rule, adopted by a 3-2 vote, companies could avoid the classification by stating that they intend to hold on to the asset and that it is more likely than not that they will, a looser standard.

Patrick Finnegan, director of financial reporting policy for the CFA Institute, said the move gives managers too much room to fudge the truth. “Financial statements are not there to reflect management’s assumptions.,” said Mr. Finnegan, whose group runs a self-study program for financial analysts.

On April 1, 2009, Michael Rapaport warned against easing the account rules for banks. His impact graphs

Accounting rule makers will vote Thursday on proposals to soften “mark-to-market” accounting, the controversial rules requiring companies to peg their investments’ value to the market’s ups and downs. Many banks blame the rules for worsening their current problems, by locking in losses that they say are merely temporary.

The banks’ claims are largely bogus—after all, no accounting rule forced them to create and invest in the toxic securities that helped cause this crisis. But the Financial Accounting Standards Board is being pressured to water down the rule.

And one of the proposals that the board will vote on Thursday, to relax the standards under which companies must take impairment charges on their “available-for-sale” investments, would be particularly worrying for investors.

Hasan doesn’t have an education or background in finance or accounting. While he’s made an impressive effort to catchup with his more experienced opponents who’ve spent years in the financial managment and investing businesses, Walker Stapleton and J.J. Ament, it appears that he doesn’t understand that the role of the Treasurer is to make sure the state invests its $6.3 billion in the debt securities issued by companies that fully disclose the current value of the assets they hold. Mark-to-market accounting showed the real current value of the banks’ holdings, not what their executives hoped they would be worth some time in the future.

It must be noted that Hasan is promising to divest the state’s investments in what he calls “bailout banks.” His opponents say that doesn’t make sense because the banks’ assets are good collateral for the bonds they issue. 

Hasan should reconsider his support for the end to mark-to-market accounting. And the incumbent Treasurer and the other two GOP candidates should take another look at whether the banks’ assets are as good as they think they are now that they’re not accounting for their assets as transparently and openly as they used to and should.

LINKS:

FASB eases mark-to-market rules. wsj.com.

Accounting rules should avoid impairment. wsj.com.

Mark-to-market accounting. Wikipedia.com.

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