Two Threats to Sound Accounting by Banks and Thrifts

Barry Jay Epstein, PhD, CPA

The recent changes to fair value accounting and to the criteria for other-than-temporary loss recognition in current earnings—as well as the lender mortgage loan loss “cramdowns” that had been proposed—pose real risks to sound financial reporting by banks and thrifts. These changes raise the specter of a repetition of the unfortunate experiment with supervisory goodwill in the period immediately before the massive (by historical, not current, standards) thrift and banking crises of the late 1980s and early 1990s. While the changes to accounting rules for determining fair value and to the recognition prescribed for other-than-temporary losses on debt instruments have already been enacted, there are still important lessons to be recalled and, perhaps, used to avert further harm. The risk of a lender mortgage loan loss mandate has been avoided (at least for the time being) but remains a concern as Congress and the Obama administration craft further responses to the current economic crisis.