How to get rich quick… if you're a bank

How would you like to increase your net worth without breaking a sweat? It's easy! And it's legal! Say your bank won't loan you money because you don't have enough assets to qualify, or maybe your fiance's parents think you're a bum because you drive a clunker and live in a shack. Don't be a dummy and tell people how much you have in the bank, tell them what you WANT to have in the bank and presto; you have new money and new respect immediately because you changed your way of thinking.

OK, to be honest, I don't think this will work for you, you're not big enough to pull it off, but the nation's major banks seem to be doing quite well at increasing their assets through what Norman Vincent Peale once called "the Power of Positive Thinking." You may have noticed that after getting all that bailout money, the banks seem to be doing pretty well for themselves, even posting hefty profits after a few months in a sinkhole of debt. Here's what they did — and DON'T try this at home because, as I said, you're not big enough — they changed the way they valued assets. Of course, they had to pressure a congressional committee to put the pressure on another outfit, but hey, it's a tough world if you're honest.

There are, believe it or not, organizations which lay down rules for the way governments and businesses do their accounting. The Financial Accounting Standards Board is a private, non-partisan organization that sets accounting standards for the private sector. (GASB does it for government accounting.) FASB has this simple little rule called "mark to market" which says that the value of your assets are worth what you can get for them in an open market, and you have to value them accordingly.

Well, the big banks don't like mark to market because it not only makes them look poor, it makes them look stupid for making dumb investments. A large part of the banking industry's collapse, in fact, was because of this pesky little accounting rule. In the days before "The Great Economic Reckoning," banks and other institutions bought a lot of what were euphemistically called 'securities' that were backed by little more than hope, and when hope went south so did the value of the securities. And, because of the mark to market rule, so did the value of the big banks.

Because the banks felt that they were having to report embarrassingly low values for these now virtually worthless pieces of paper (or these days it's electrons inside a computer, I guess), they wanted to change the way they valued them, so they went to FASB to put the muscle to them. No dice there, so they went to Congress and hit pay dirt, and it only cost them $27.6 million in lobbying expenses to hit it. They pressured members of the House Financial Services subcommittee to pressure FASB to change the rules. Not surprisingly, FASB buckled and changed the mark to market rule so that banks could value their worthless securities at what they THOUGHT they were worth, not what they would sell for.

In a revealing — to anybody but members of, apparently — exchange between former Securities Exchange Commission member, Conrad Hewitt, and lobbyists for the banking industry it was established that while the banks had to value a particular security at 50 cents, they thought it was worth more like 80 or 90 cents. Hewitt asked, "Do you have a lot of buyers because of this low price?" No, said the bankers. "Then maybe the securities should be valued at less than 50 cents," said Hewitt (Wall Street Journal, June 3rd, 2009). So much for common sense; the House Financial Services subcommittee put the screws to the FASB folks, the rules got changed, and overnight banks made fabulous profits with a stroke of a pen by increasing the value of the securities to what they thought they should sell for.

A fellow named Martin Weiss, who makes his living rating financial companies, told Bloomberg News, "The big banks' profits were totally bogus."

In a world where financial honesty in our larger financial institutions is matched only by the integrity of a snake oil salesman it is tempting to just shrug our shoulders and say, "So what else is new?" But since we just got done pouring billions of taxpayer dollars into these outfits maybe we should ask for a little economic honesty from them, which is exactly what the mark to market rule was all about … once upon a time.

[This article is based on a story in the Wall Street Journal of June 3, 2009—"Congress Helped Banks Defang Key Rule"]

Jim Elliott is a former state senator from Trout Creek. He served in the Montana House 1989 to 1996 and the Montana Senate from 2001 to 2008.