Yesterday, I did a blog entry looking at regulators had changed accounting rule to look after the banks and how Deutsche Bank had used that to disguise a loss as a profit.
Now, CFO.com reports that the Securities and Exchange Commission and Financial Accounting Standards Board have bent the rules, allowing banks to get away with not valuing warrants using fair value accounting. What that means is that banks won't have to report potential losses if the market value of the instruments decline. It's a neat little trick called reclassification. By reclassifying the warrants as permanent equity rather than derivatives, the gains and losses don't show up in the earnings.
As Bloomberg columnist Jonathan Weil noted last month, bending the rules to protect the banks doesn't help anyone. Not when the market is screaming out for transparency. "The trouble with throwing a lifeline to dying banks is they keep trying to pull the rest of us into the drink … What investors need now is a good reason to believe corporate balance sheets. Otherwise, it won't matter how much taxpayer money gets pumped into ailing financial institutions. We'll still be risking systemic meltdown because nobody, especially the banks, will be able to trust anyone else's books. Yet that's where the banking industry and its lobbyists keep taking us. They want government blessing to value their assets any way they want, using whatever numbers they desire. And the banks will fight to their deaths to get it."
The question is who is looking after investors? Certainly not the accounting regulators. These sorts of changes give entities too much leeway. Or to put it bluntly, it lets them to hide important information from investors.
Or as Weil says: "If all this leaves you wondering who's protecting investors, join the club. Even when the watchdogs try to do the right thing, they risk getting run over by some industry shill. The longer it keeps up, the more it will dawn on investors how rigged the whole game is. This is no way to inspire confidence."
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