The Securities and Exchange Commission has given the banking a much deserved kick in the guts by releasing a 211 page report that fends off the banks' claim that fair value created the financial meltdown, even though they made a fortune out of it when times were booming.
The SEC said banks only had themselves to blame, and that fair value had nothing to do with it.
"The staff observes that fair value accounting did not appear to play a meaningful role in bank failures occurring during 2008," the SEC said. "Rather, bank failures in the U.S. appeared to be the result of growing probable credit losses, concerns about asset quality, and, in certain cases, eroding lender and investor confidence. For the failed banks that did recognize sizable fair value losses, it does not appear that the reporting of these losses was the reason the bank failed."
"Our detailed analysis of bank failures indicates that for substantially all failed banks studied, fair value accounting was applied to only a small minority of assets, and losses recorded as a result of applying fair value accounting did not have a significant impact on the banks' capital. While the application of fair value varies among these banks (and is generally more extensive at larger institutions that engage in trading activities), in each case studied it does not appear that the application of fair value can be considered to have been a proximate cause of the failure."
The SEC has left the way open to providing banks with additional guidance for determining fair value in inactive markets but what's important here is that the banks have been rolled.
But it would have been unforgivable for the SEC to have done anything else. The banks were screaming for special treatment but the reality is you can't have one set of accounting standards for one part of the economy, and another set of rules for another sector.
And the bottom line is that the meltdown was not caused by accountants.
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