The Dangers of Accounting Changes, Part 2

A week ago Thursday, I wrote about the dangers of removing the Enron enacted accounting rules called mark-to-market.  How removing those rules would enable banks to puff up their books, even though the value of the assets (loans) had not changed, and in fact, may be declining on a daily basis.

Yesterday I read an interesting article linking the changes in the mark-to-market rules and the Latin American "debt crisis" of the 1980s.  While there were some incorrect statements in the article (the author believed the accounting rules were "regulations" which they are not, they are rules promulgated by a private organization, however that does not mean Congress and the Obama Administration do not pressure the Financial Accounting Standards Board (FASB) into changing it's standards) linking the recent changes to how the Reagan Administration handled the Latin American debt crisis is interesting and enlightening.

Compressing a lot of history, large multi-national banks, primarily led by Citibank, loaned billions and billions of dollars to countries like Chile, Argentina, Brazil.  The mound of debt finally succeeded in crushing the countries' ability to pay and Citibank found itself close to insolvent, holding onto "toxic" assets on its books without cash payments coming in the door.  Sound familiar?

But if Citibank declared those assets worthless, the bank itself would be bankrupt.  Instead, it continued to value the assets at the face amount of the loan plus interest owing, and instead of realistically negotiating with the countries for a reasonable debt repayment, the banks, International Monetary Fund, and the US Government hammered for interest payments, more interest payments, and yes, even more interest payments.  

The result was crushing to Latin America, which took years to get back on it's feet, meanwhile Citibank turned around and used the same business plan here in the United States with homeowners and businesses.  Not to pick on Citibank, but remember, it is the owner of Household Finance, a rather well known predatory lender who has been fined a number of times for violating many different states' consumer protection laws.  

The changes in the mark-to-market rules are an inducement for banks to NOT re-negotiate with homeowners on their loans, rather to hold firm, hammering for more and more payments.  And the results will more than likely be similar to what happened in Latin America, the housing market will take longer to stabilize, people's lives will be hobbled and crushed, and our economy will continue in this tailspin.

But hey, the banks' ledgers will look good to stockholders and isn't that what it is all about?