Should we trust Citigroup with "significant judgment" on accounting?
The Financial Accounting Standards Board agreed to relax accounting rules for the benefit of troubled financial institutions like Citigroup:
April 2 (Bloomberg) -- The Financial Accounting Standards Board, pressured by U.S. lawmakers and financial companies, voted to relax fair-value rules that Citigroup Inc. and Wells Fargo & Co. say don’t work when markets are inactive.
The changes to so-called mark-to-market accounting allow companies to use “significant” judgment when gauging the price of some investments on their books, including mortgage-backed securities. Analysts say the measure may reduce banks’ writedowns and boost their first-quarter net income by 20 percent or more. FASB voted on the rules at a meeting today in Norwalk, Connecticut. [Bloomberg]
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Fair-value requires companies to set values on most securities each quarter based on market prices. Wells Fargo and other banks argue the rule doesn’t make sense when trading has dried up because it forces companies to write down assets to fire-sale prices.
By letting banks use internal models instead of market prices and allowing them to take into account the cash flow of securities, FASB’s changes could raise bank industry earnings by 20 percent, according to Robert Willens, a former managing director at Lehman Brothers Holdings Inc. who runs his own tax and accounting advisory firm in New York.
Companies weighed down by mortgage-backed securities, such as New York-based Citigroup, could cut their losses by 50 percent to 70 percent, said Richard Dietrich, an accounting professor at Ohio State University in Columbus. [Bloomberg]
After all that's happened why on earth should we trust Citigroup's internal models to value anything, especially when Citigroup stands to massively reduce its losses by its choice of model?
How does allowing the banks to make self-serving guesses about what their worthless assets might be someday be worth help anything? The market will know the banks are viewing their toxic portfolios through rose colored glasses and discount accordingly.