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Board to Ban Accounting Practice That Helped Lending Proliferate; Rule Change Aimed at Preventing Another Financial Crisis
By Martin | June 2, 2009
The end is nearing for an accounting trick destined to be remembered as a hallmark of the housing boom, because it allowed financial firms to conceal a vast expansion in their lending from regulators and investors.
Under this strategy, firms placed trillions of dollars in loans in the financial equivalent of self-storage facilities. They were not required to disclose the contents or maintain capital buffers against potential losses. By allowing firms to expand lending without increasing capital, the practice increased profits. But it left firms ill-prepared to absorb losses as defaults rose.
Now, as regulators move to prevent another financial crisis, the trick has become an early target. The Financial Accounting Standards Board, the nonprofit organization that sets bookkeeping rules for U.S. companies, is scheduled to vote this morning to prohibit the practice as of the beginning of next year.
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