Robert Rubin, former Treasury Secretary, head of Goldman Sachs (GS), and recently departed senior board member at Citigroup (C) has been telling anyone who will listen that "mark to market" accounting ruined big banks. That is to say, his reputation would be fine if CPAs has simply done the right thing.
Now banks are up against another set of accounting standards which could force them into yet another round of write-offs and losses. Maybe the federal government can influence a change in GAAP rules to push the problem under a rug.
The Wall Street Journal says, looking at the bad bank program, "The fear: if the Obama administration opts for such a structure to buy troubled loans and securities, some banks may have to recognize big losses offloading assets at prices below the valuations on their balance sheets."
It is hard to see how the banks are served by that. If their CFOs had a choice, the paper would be written off over some time period.
What the accounting behind a bad bank would do is require the government to make more loans or buy more stocks in the institutions to build balance sheet after the write-offs. The Treasury and Fed would have to fashion a way to do this which would mean the government would pay for the bad assets and then invest to get bank balance sheets back up to par.
The bad bank idea may be a good one, but it gets the government financially much deeper into the banks then it would appear at first blush.
Douglas A. McIntyre
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