FASB Changes Send 'Wrong Signal': Ex-FDIC Chairman
Special to CNBC.com
The change in so-called mark-to-market accounting rules sends the wrong signal, said Donald Powell, former FDIC Chairman.
Speaking ahead of the Financial Accounting Standard Board's official decision, Powell told CNBC that he would prefer this change to occur after the financial crisis has calmed some, saying that an honest balance sheet is more important to investors.
FASB, an independent board that sets U.S. accounting standards, ruled Thursday that companies could have more leeway when valuing assets. This change is expected to help boost banks' balance sheets.
Mark-to-market rules required companies to value assets at prices reflecting current market conditions. With the changes, companies can now value assets at what they would go for in an "orderly" sale, as opposed to a forced or distressed one.
“But the most important thing I think is that the American people and the investing public believe what a balance sheet says,” Powell said in an interview with CNBC that occurred before the official changes were announced. Watch the video to hear the full interview.
“I think the timing of this, perhaps, is not necessarily good because we’re about to see if we can sell some of these assets that we need to get out and that kind of sends a wrong signal. And also I think this mark-to-market, the final ruling and the final conclusions ought to be after we’ve gotten through this crisis,” Powell said.
The accounting changes will go into affect in the second quarter of this year, but companies can request to use the revised standards in the first quarter.
Powell said he is going to be looking carefully at upcoming earnings results from the banks.
“I really am anxious to look at the earnings from most of these larger institutions that will be coming out in the next 20 days. I think that’s a very important benchmark point,” Powell said. “I’m going to be looking at operating income before write-downs and before taxes. I want to be sure that these banks are making money the old fashioned way. And I think hopefully we’ll have some good results.”
“Going forward there are three very important issues: capital, capital and capital. It’s critical that we look at the way we measure capital at these financial institutions,” he said. “I think we’ve gotten a little bit off mark when we’ve gone to risk-based capital. I understand that all balance sheets are not created equal, but minimum regulatory capital is going to be critical going forward, especially at the large institutions. I think they’re going to be required to maintain more capital.”