Shame on banks! Shame on the congress! Shame on Financial Accounting Standards Board!

Another political move without thinking about the repercussions it can cause in the financial market and long term damage that can come along with it.

Today (April 02, 2009) Financial Accounting Standards Board changed the accounting rules for banks by giving them freedom to value their assets and put any price tag on it no matter what anyone else is willing to pay for it in the free market. I am still unable to digest it. Why would such rule be allowed?

How can you put any price tag on the asset ignoring the real market value? Price of an entity is only as good as the price a buyer wants to pay. If today nobody wants to pay $1000 for cup of coffee nobody will sell this expensive product as there won't be any demand for such product. As long as this is happening in the free market it's OK as the market will take care of the price based on the supply and demand balance.

But having such leeway in a heavily regulated banking industry is a recipe for a disaster; it's like a time bomb.

Banks had to show quite significant amount of losses because of the mortgage backed securities, also called toxic assets, losing their values in the market. This caused balance sheets of banks to bleed. Banks losses caused their stocks to drop to record levels. And finally banks blamed it all on the accounting rules because they had to value those assets based on what they would get for them in the market. Banks just shifted the blame for aggravated economic situation on legitimate accounting rules.

Banks forced congress to put pressure on FASB to make changes in the accounting rule and now banks have got what they always wanted - having freedom to cook their books. Banks can now inflate the price tag on "toxic assets" and show false profit fooling investors by phantom profits finally achieving the goals of soaring stock prices. Why would banks want their stock prices to rise? Because their executives have bigger parts of their salaries tied to their banks' stocks.

On one hand the treasury wants to help private investors buy those toxic assets and on the other hand banks have been given freedom to put any price tag on those assets. I won't be surprised if private investors back off after banks put impractical price tags on their assets.

Question that comes to my mind is - why would bank want to get rid of such assets when they can play with it to show false profits? What's on the mind of Obama's administration and what's on the minds of our leaders in the congress?

Investors, who sometime lose their rationale when they see green bucks, must be wary of this change. Any rise in stock market caused by the lack of insight in this decision is transient.

A few investors were happy with this decision and I wonder if they were the ones who participated and promoted the toxic assets.

As for me I am only shocked and appalled at the bad decisions highly educated and informed people in power can make without thinking about the future. Where is the vision? Where are the leaders in USA?