Board to Ban Accounting Practice That Helped Lending Proliferate

Board to Ban Accounting Practice That Helped Lending Proliferate - 5/18/2009

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HEADLINE NEWS:

Board to Ban Accounting Practice That Helped Lending Proliferate, Rule Change Aimed At Preventing Another Financial Crisis
Binyamin Appelbaum

Washington Post. May 18, 2009
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EXCERPT: The end is nearing for an accounting trick destined to be remembered as a hallmark of the housing boom, because it allowed financial firms to conceal a vast expansion in their lending from regulators and investors. Under this strategy, firms placed trillions of dollars in loans in the financial equivalent of self-storage facilities. They were not required to disclose the contents or maintain capital buffers against potential losses. By allowing firms to expand lending without increasing capital, the practice increased profits. But it left firms ill-prepared to absorb losses as defaults rose. Now, as regulators move to prevent another financial crisis, the trick has become an early target. The Financial Accounting Standards Board, the nonprofit organization that sets bookkeeping rules for U.S. companies, is scheduled to vote this morning to prohibit the practice as of the beginning of next year. "It was intended as a convenience, but it got stretched," said Marc A. Siegel, one of FASB's five members. "It got stretched to the point that we want to eliminate that loophole." The creation of new storage facilities already has dwindled, but a rule change also would force companies to report the contents of existing facilities and to increase their capital reserves accordingly. Regulators calculated as part of recent stress tests that the new rule is likely to force the 19 largest U.S. banks to acknowledge about $900 billion in loans and other assets. The change also eliminates a basic part of the securitization process by which loans were bundled and sold to investors. The recovery of that market is viewed as critical to a full-fledged lending revival, because investors in recent years provided the bulk of funding for new loans. It is increasingly clear that the system will have to be redesigned rather than simply restarted.

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