Volcker Rule Blame Game Begins

Jonathan Weil joined Bloomberg News as a columnist in 2007, and his columns on finance and accounting won Best in the Business awards from the Society of American Business Editors and Writers in 2009 and 2010.
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It turns out that a good-sized chunk of Zions Bancorp's earnings existed only in its executives' minds. For this nugget of knowledge, we can thank the Volcker rule. Or at least that's what the bank is blaming for its newfound losses.

The Salt Lake City-based lender today said it would record a significant charge to earnings to write down a bunch of collateralized debt obligations that it won't be allowed to hold once the Volcker rule -- designed to prevent banks from gambling with federally insured deposits -- takes effect. The size has yet to be determined. However, if the charge were based on Sept. 30 prices, Zions said it would have been about$387 million. Zions hasn't earned that much in a fiscal year since 2007.

The losses aren't new. Zions just didn't have to recognize them before because of the way the accounting rules let companies report their bond holdings. Zions had been classifying the CDOs as "held to maturity," which let it avoid recognizing the decline in value as part of its earnings. Now that Zions no longer has the ability to hold them to maturity, the bank said it will relabel the CDOs as "available for sale" and write them down to their fair-market values, triggering the earnings hit.

In other words, the accounting rules had been letting Zions maintain a fiction. The bonds didn't refrain from falling in value just because they were classified as held-to-maturity. A bond doesn't care what its owner intends to do with it.

When investors look at a bank's books, they want to know how much its assets are worth. Giving companies the option of classifying a given bond as "held to maturity," "available for sale" or "trading" -- each with vastly different accounting consequences -- creates needless complexity. The simpler, more informative approach would be to have only one category and require companies to mark their securities to market values, with changes flowing through earnings each quarter. Of course, a lot of companies like maintaining the fiction because it makes their numbers look so much better.

Zions almost certainly won't be the last bank to make a disclosure such as this one. Perhaps one of the silver linings to emerge from the Volcker rule's implementation will be that some banks will be forced to finally do some needed cleanup work on their financial statements.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the author on this story:
Jonathan Weil at jweil16@bloomberg.net