The FASB is wrong---not unusual

The Obama administration has made a giant step in addressing the mistakes of the FASB(Financial Accounting Standards Board), this somehow previously sacrocant but flawed group of experienced accountants and narrow minded bureaucrats, by recommending that the loan-loss provisioning standard be revised to a sane one. The standard set by these inexplicable quasi-regulators was such that bankers could only reserve against current non-performing loans to determine what their loan loss provisions should be. Under the Clinton and Bush administrations the SEC would indict banks for managing earnings if they appeared to be too conservative in their reserve for loan losses policies(too conservative?). Obviously, when times are good, capable bankers do the work to determine how much should be aside to protect the bank against future loan losses. The FASB did not allow it, and the SEC agreed.

For example, the credit card business is a hugely quantitative business. They know everything about aggregate groups and sub-groups. They know and price in the fact that loan losses on a prime based portfolio might, for example, be between 3.5% and 6.5% depending on where we are in the economic cycle. When they are at the lowest level, they should be reserving more but the FASB and the SEC would not allow it. Scratch your head and figure out who could benefit from this---bureaucrats just covering their jobs or hedgers setting up a fall---take your pick. Members of the FASB should be audited for lunches, trips, loans, etc. Bet you that there will be something there.

As Jamie Dimon of JP Morgan Chase said, "I find it absurd that loan-loss reserves tend to be at their lowest point precisely when things are about to get worse". But that's the effect of the FASB. No one should think that they are anything but a group of challenged accountants and lost souls from the investment community who are terrified by what happened in light of Arthur Anderson's demise after Enron, and who have no understanding of corporate finance or capital markets. That the Obama administration recognizes this is just fine, and it should play over into the issues of extremes on mark to market accounting which are beginning to be well known and all parts of the accounting code. Using the FASB as some sort of intelligent backstop is a joke---just look at this loan loss provisioning issue as an obvious example.