Many years ago, the US Financial Accounting Standards Board (FASB) properly decided that many financial assets should be valued on the balance sheet at fair value.
This infuriated many financial institutions including Banks but also many non-financial institutions because they would all no longer be able to manage their quarterly reported earnings and instead report their quarterly earnings which are more aligned with real economic earnings.
Unfortunately, the FASB knuckled under to this intense pressure by lobbyists for the financial institutions and a compromise was made that resulted in Investment Securities being divided into three categories.
First, Trading Investment Securities would be valued at fair value and any changes in their Unrealized Holding Gains and Losses would be recognized in the quarter when the Change in the Unrealized Holding Gains and Losses occurred.
Second, Investment Debt Securities Planned to be Held to Maturity would not be valued at fair value but instead go on the balance sheet at Cost or at Amortized Cost. Thus, there wouldn't be any quarterly Unrealized Holding Gains and Losses recorded.
And third, all other Investment Securities where fair values are available would be categorized as Available-For-Sale (AFS) Investment Securities and valued on the Balance Sheet at fair value. But the compromised very questionable and very strange twist was that any quarterly Change in the Unrealized Holding Real Economic Gains and Losses would not be reflected in the regular income statement but instead would be reflected in Other Comprehensive Income which unfortunately almost all financial analysts and even Company Board of Directors ignore.
The FASB was wrong when it just assumed financial investors would give the elements of Other Comprehensive Income their due real economic income respect.
Case in point ..... the fairly large SVB Financial Group that just recently filed for bankruptcy.
From its Investment Securities Footnote related to its December 2022 10-K filed with the US SEC, SVB Financial Group had Unrealized Holding Losses of $2.533 Bil related mostly to its US Treasury Securities and its Residential Mortgage-Backed Securities investment holdings.
To show how significant that $2.533 Bil Unrealized Holding Loss is to SVB Financial Group, its Regular Pretax Income in annual 2022 was a lower $2.172 Bil.
Also, at Dec 31, 2021, these Unrealized Holding Losses were only $313 Mil.
Clearly, US Fed Chair Jerome Powell's decision to substantially increase US Short-Term Interest Rates so rapidly and by so much was the predominant catalyst for US Banks substantial increase in their real Unrealized Economic Holding Losses of their AFS Investment Securities, which triggered the current US Banking Crisis.
SVB Financial Group's Loss Risks on its Available For Sale Investment Securities at Dec 31, 2022 were properly under US GAAP reported in Other Comprehensive Income and also disclosed in its footnotes.
But what good is that if financial analysts pretty much ignore each of these disclosures?
And the US Security and Exchange Commission does not require the key real Unrealized Economic Holding Gains and Losses amount be disclosed very prominently in Company Quarterly Earnings Releases. And when it is disclosed, it is buried in a very obscure place in the very lengthy Bank Quarterly Earnings Release.
Then shortly after 2022 year end, on March 8, 2023, SVB disclosed in another SEC filing that it was selling $21 bil of its Available-For-Sale Investment Securities with a 1.79% Interest Yield and a 3.6 Year Duration and that the resultant Realized After-Tax Loss was estimated at $1.8 Bil and it would be reflected in its First Quarter Regular 2023 Earnings.
Then the shit hit the fan and many cash depositors quickly withdrew their cash from SVB Financial Banks to the extent that they could.
Economically, these Unrealized Holding Losses occurred prior to December 31, 2022 but because they were included in Other Comprehensive Income rather than in Regular 2022 Earnings, the financial analysts short-sightedly weren't concerned much about it.
But shortly after December 31, 2022 when the Unrealized Losses were realized and thus be required to be recorded in First Quarter 2023 Regular Earnings, the start of the current banking crisis occurred and now a lot of people are investigating how much each US bank and even some non-financial companies have in real Unrealized Economic Holding Losses at December 31, 2022 and whether they are being wisely hedged and also trying to find out how much additional real Unrealized Economic Holding Losses each US Bank has so far in the First Quarter of 2023.
So it's not just the Bank Board of Directors, the Bank CEOs, the Bank CFOs, the Bank Company Risk Managers, the Financial Analysts of Banks, the US Government Bank Regulators, the US SEC, the US Senators, the US House Banking Committee Members and clearly most of all the US Fed Chair Jerome Powell who are all the predominant causes of this current Banking Crisis by acting incompetently.
But it's also the US FASB for not doing what was and is right ..... making financial disclosure useful to investors.
To Report Income-Smoothed Quarterly Earnings as being anything close to real Quarterly Economic Earnings breaks the back of successful US Capitalism.
