“Extend & Pretend”: Where Are We After One [and a half] Years of the Suspension of the FASB Rules?

Note: I originally posted this on Yves Smith’s blog naked capitalism, last April 4. The original post is here.

Recently, William Black has more or less pointed out the same thing, as reported by Mish Shedlock here: With the financial industry having pressured Congress, the accounting rules have been softened to the point where they cannot discern a healthy bank from an insolvent one. Hence, zombie banks, and a Japanese-style lost decade.

My April 4 post:

In 1982, many of the banks hit by the Latin American debt crisis were effectively insolvent. Paul Volcker, as the then-Chairman of the Federal Reserve—charged with overseeing the banking system—effectively cast a blind eye on this banking insolvency.

Volcker’s reasoning seems to have been that the US banks were not broke—they were just getting temporarily squeezed. Volcker seems to have concluded that time would heal the balance sheet wounds caused by the Latin American defaults. Therefore, to hold the banks to the letter of the accounting rules would likely drive one or more of them broke, to no useful purpose—and it could potentially cause a bank panic and general financial crisis. But to pretend (for a while) that all was right with the US banks would avoid a potential panic—so long as the crisis sorted itself out and the banks repaired themselves by writing off and renegotiating their toxic Latin American debt.

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