More on FASB Rule 159/

The books listed in my profile as my favorite books are just the ones that I am reading now.

This is my first post in response to inquiries about FASB rule 159 as shown in my new FeedJit widget.  I wish that I could be of more assistance, but I have no training in accounting.  I am therefore struggling with this issue myself in my capacity as an individual investor who has expanded his position recently in some bank trust preferred issues as well as some nibbling in a few common stock names.     

FASB Rule 159 was apparently lobbied for by the banks who argued that it would be unfair to require them to mark-to-market their investments and assets without allowing them to mark-to-market their liabilities.  As the author of this Bloomberg story opined, it is part of the new bank math, where minus 2 plus minus 2 equal plus 4.Bloomberg.com  It is up to the company to decide how much of their debt can be marked to market.  So if Citigroup's debt falls to 50 cents on the dollar, and the bank marks all of it to market and pretends to retire it, then the bank can presume (or pretend would be a better word) that it retired the debt and reduced its liabilities. 

I would agree with Dick Bove who is quoted in the Bloomberg article that FASB 159 is just one of those rules that takes accounting further from the real world into make believe.  

 I read over the weekend that the proper use of FASB 159 results just in a one time posting to retained earnings and the gain or loss is not reflected in the earnings.   CFO.com 

This last linked article explains how the rule might be manipulated by a company. I would need an accountant familiar with these rules to explain that one to me.  Accountants that delve into these issues would be a better source of information than me.

Some of the comments are interesting to the WSJ story where the GS analyst was quoted as saying Citigroup would have had a loss without this FASB Rule.   WSJ   I had previously linked stories in the WSJ and NYT discussing how this rule impacted earnings for J P Morgan and Citigroup, and this is a link to a Reuters article.  ReutersFASB Rule 159 and Bank Earnings/ Torture and the Imperial Presidency: Why are those Conservative Values?/ 

On a subject like a FASB accounting rule, I am just giving my reaction to the comments of others about the impact a FASB rule has on revenues and earnings.   I am certainly not qualified to follow how that kind of adjustment flows through an accounting statement which I dare say is also true for virtually all individual investors trying to figure this out.  I am just staying away from anything connected to Citigroup for now.  

Apparently this rule did have a negative impact on Morgan Stanley's last results. NYTimes.com