The information that accumulated helped make it possible for the board to eventually impose the rule it had wanted to pass in the first place.

TO BE NOTED: From the NY Times:

"“Integrity” and Standard Setting

The Financial Accounting Standards Board changed the rules today, as expected, to give banks more leeway in determining what their assets are worth. The board says it is also requiring better disclosures, but it will be a week before we get details on that, and longer than that to see how the banks interpret that rule.

As readers of this blog know, the change came after a subcommittee of the House Financial Services Committee made clear that FASB could be destroyed if it did not knuckle under to the banking lobby.

Arthur Levitt and Bill Donaldson, two former chairmen of the S.E.C., bemoaned the politicization of the board, but the current chairman of the commission, Mary Schapiro, does not appear to have resisted the political pressure. That is understandable, but not necessarily admirable.

Mr. Levitt knows what it is like to cave in to such pressures. He still feels guilty about the last time politicians forced the board to back down on a rule, on stock option accounting. As chairman, he advised the board to retreat, and then issued a strange statement praising the board’s “great courage.”

The most notable reaction I’ve seen tonight came from Barney Frank, the chairman of the Financial Services Committee (and a man who is proud that, on stock option accounting, he did not join in the fight against the rulemakers). His office released the following statement from him:

“I applaud the very important actions taken by FASB today, which has made significant progress toward addressing inaccurate asset valuations in the markets. The FASB believes the rule can be applied more fairly and take into account the currently dysfunctional state of some markets. The integrity of the standard-setting process is preserved, while avoiding the pro-cyclical effects of improper valuation practices.”

Just how was the “integrity of the standard-setting process” preserved by using political pressure to force the board to do something it did not want to do? And how does Mr. Frank know that markets are now producing “inaccurate asset valuations,” but that the banks that created and bought these assets know what they are really worth?

If the disclosures the FASB will now require really provide useful information, this could be a pyrrhic victory for the banks, much as the win on stock option accounting might have been.

Then, as now, those putting pressure on the banks wanted to keep reported profits from being changed by something they deemed unreasonable. But the FASB, in backing down, forced disclosure of what the impact would have been if options were expensed. The information that accumulated helped make it possible for the board to eventually impose the rule it had wanted to pass in the first place.

Could it be that these disclosures will work in the same way, by making it clear to those who read the footnotes just how much profits are being pumped up by the banks assuming that they know the real values of assets, even though nobody will pay that price for them right now?

In the long run, such disclosures might make it possible for us to track just how right (or wrong) the banks were in their confidence that they knew better than the market.

Or maybe my innate optimism is showing, and the new disclosures will not provide much useful information at all."