Two week ago I wrote about Junk Accounting at used by Radian Group Inc. The company, in deep trouble, marked its debt "to market" and booked the difference of what it really owned to what other expected it would be able to pay back as a profit.
Today Bloomberg picks up the issue and there are bigger names involved:
Merrill Lynch & Co., Citigroup Inc. and four other U.S. financial companies have used an accounting rule adopted last year to book almost $12 billion of revenue after a decline in prices of their own bonds.
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Here’s how it works, according to Richard Bove, an analyst at New York-based Ladenburg Thalmann & Co. A company decides to designate $100 million of its subordinated bonds as subject to mark-to-market accounting. The price of the bonds drops to 80 cents on the dollar from 100 cents. So the firm books $20 million on the "presumed savings that you have on your liabilities," Bove said.
The rule change by the Financial Accounting Standards Board (FASB) that allowed this mess was introduced in February 2007 after heavy lobbying by Wall Street.
According to Bloomberg, the Federal Reserve, Federal Deposit Insurance Corp., Office of the Comptroller of the Currency and Office of Thrift Supervision protested against the introduction of the new rule.
But the FASB is a private institution and the Security and Exchange Commission, which has statutory authority over accounting rules, simply did not use its legal power, but defered to the industry owned institution.
Banks ‘regulating’ themselves will end in a big, big mess. Then the taxpayers will be asked to bail them out again. Thus rulez the market.