Bank stocks at least 20 percent undervalued thanks to accounting rule change

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By caving into pressure from Wall Street, the Financial Accounting Standards Board (FASB) just single-handedly added at least 20 percent to the value of major banks burdened with formerly toxic waste. What just happened is that FASB passed an accounting ruling that allows the banks to decide the value of its toxic waste rather than letting the market set a price.

It would have been best to place your bets on this outcome last week, but today banks stocks are likely to spike because analysts will be revising upwards the value of their assets and slashing the write-offs that these banks need to take as a result of their bad bets on toxic waste. Moreover, since the banks will probably boost the stated value of these assets, they'll be able to take profits and will soon find themselves paying back the TARP money, which will let them return to the business of paying themselves multi-million dollar bonuses.

I was half-hoping this was all an April Fool's joke. But one should never underestimate the power of campaign contributors to change the rules in their favor. And for all the winners from this accounting rule change, there must be losers.

One of the biggest losers will be people who try to use financial statements to assess the true financial condition of a company. With bankers using their internal models to value their toxic waste, we can be sure that they'll write themselves a glowing report card.

Peter Cohan is president of Peter S. Cohan & Associates. He also teaches management at Babson College. His eighth book isYou Can't Order Change: Lessons from Jim McNerney's Turnaround at Boeing.

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