Replies to post #5648 on Direxion Daily Financial Bear 3X Shares (FAZ)

[daytrader2008]

Bad news for the financial sector just out

FASB tightens off-balance-sheet loan rules


FASB ending device that kept loans off banks' balance sheets without disclosure, capital



WASHINGTON (AP) -- The board that sets U.S. accounting standards on Monday moved to end companies' use of a device that allowed them to park hundreds of billions of dollars in loans off their balance sheets without capital cushions and has been blamed for helping stoke banks' losses in the housing boom.

The change will tighten the use of so-called "qualified special purpose entities" by requiring companies to report to regulators the loans contained in them and to increase their capital reserves in proportion as a cushion against potential losses.

It was the lack of disclosure and absence of capital supporting ballooning subprime mortgage loans in these special entities that aggravated the massive losses sustained by banks, regulators say.

The Financial Accounting Standards Board said the rule change was intended "to improve consistency and transparency in financial reporting." The FASB voted to adopt it at a public meeting of its five-member board at its headquarters in Norwalk, Conn. A revised proposal had been opened to a public comment period that ended in November.

The change by FASB cuts in the opposite direction of its move last month -- surrounded by controversy and with some dissension by board members -- giving companies more leeway in valuing assets and reporting losses. That revision in the so-called "mark-to-market" accounting rules was expected to help boost battered banks' balance sheets, while the new rule change likely will result in financial institutions recognizing on their books billions in high-risk loans that may default.

FASB acted on the mark-to-market rules amid intense pressure from Congress, which threatened legislation. The board received hundreds of comment letters opposing the move from mutual funds, accounting firms and others contending that it would damage honest financial reckoning by masking the deficiencies and risks lurking within the system.