In April, FASB (Financial Account Standards Board) caved to incredible pressure from financial conglomerates and politicians when it agreed to severely limit "mark to market" rules (FAS 157). But, did FASB get a little revenge with the decision to eliminate the exemption of Qualified Special Purpose Entities from balance sheet treatment.
This is how financial conglomerates used Qualified Special Purpose Entities:
Lenders recorded profits before the U.S. subprime mortgage market collapsed in 2007 by selling pooled loans to off-balance- sheet trusts, which repackaged the pools into mortgage-backed securities. Banks then sold those securities to other off- balance-sheet vehicles they sponsored, concealing from investors that the securities were backed by deteriorating mortgages.
According to FASB, today's decision was driven an interest in more transparency in financial reporting. But the financial conglomerates are screaming:
The rule change will hurt banks and the economy by discouraging lending, said Wayne Abernathy, executive vice president at the American Bankers Association in Washington. “It will affect fee income and the economy’s ability to rebound on the lending side,” he said in an interview before the vote.
So, did the accountants get their revenge? Maybe, revenge is too strong of a word. FASB is doing the right thing by pushing for more disclosure of off-balance vehicles. After all:
Investors are wary of a company’s unknown obligations as the world’s biggest banks and brokerages reported more than $1.4 trillion in writedowns and credit losses since the start of 2007, some stemming from losses in off-balance-sheet vehicles.
This is how you restore confidence in the market - make these financial conglomerates disclose any off-balance sheet junk.