A while back I posted about something called “goodwill” — an accounting term which means very little but, by accounting standard practice, shows up on corporate financial statements. If you can’t tell by my tone of voice, I don’t put a lot of stock in the concept of "goodwill".
Much to my dismay, I discover that, in light of the current financial crisis, that regulators are now thinking about letting banks pretend that "goodwill" actually means something (HT: A. Garvin):
Under the proposal issued this week, the regulators would permit buyers of banks and thrifts to count some of the goodwill toward meeting their regulatory capital requirements.
In other words, something which has no material value whatsoever now suddenly counts for something.
Let me give you an analogy for how insane this would be if it goes through. Let’s say I wanted to buy a house and you’re my friendly neighborhood banker who’s helping me take out a mortgage to buy it with:
YOU: So, did you like the place?
ME: This place was awesome!
YOU: So, how much is the place?
ME: $400,000.
YOU: Ok, well, we’ll need a $100,000 down payment…
ME: Sounds good, except for one thing.
YOU: What?
ME: I don’t have that much cash. But don’t worry, I can give you this hug which I think is worth $400,000! Would that be all right?
YOU: Sure!
Now, correct me if I’m wrong, but didn’t the current crisis start because of something tantamount to trading something (houses) for nothing (the promises of subprime borrowers to pay)?