With all of the political claims of "transparency," the current challenges are actually accounting-based. A natural question for a business reader is "Why are the problems at the big banks and not the regional ones?" By reading the headlines, one might conceive that only big banks have gotten into trouble. Not so.
The larger banks have moved into more of a securitization-based method of business. This method, while superior, has a different set of accounting rules - those that "mark to market." Those of us in the securities business knew what a potential insanity would ensue - it's kind of like balancing my checkbook based on my wife's moods. Complete nonsense (well...mostly).
We have seen the results of this nonsensical accounting with regard to Fannie Mae and Freddie Mac. As these businesses delivered good results for the past few years, they were perenially under a black cloud for "accounting irregularities." The "mark to market" accounting, rather than actual cash flows, caused nightmarish financial restatements with billions suddenly disappearing and then reappearing. Analysts eventually just ignored all of the new accounting.
The regional banks are still, by virtue of antiquated methods of finance, allowed to use old-style accounting. When the cash flows start to decline, as they surely will, these banks will start to reveal lower earnings. The silver lining to the cloud of this "mark to market" nuttiness is that when the problems set in, the institutions are better prepared. For example, Fannie Mae and Freddie Mac have been much better prepared for the current crises as a result of years of haggling over their accounting. Ironically, then, a couple of years from now, larger banks (those that make it) may profit from this discrepancy.
The Law of Unintended Consequences lives on.
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