When the Securities and Exchange Commission, backed by a clutch of academics and washington Beltway "bankophobes" tried to ram through mark-to-market accounting two or three years ago, many breathed a sight of relief when the industry came away with the hodgepodge compromise we live with today: the three separate investment categories "held to maturity," "held for sale," and "trading account."

They christened it FAS 115.

A camel has been defined as a horse made by a committee, but the collective wisdom of Washington, the accounting fraternity, and the banking industry has produced something closer to the pushme-pull you" animal from the Dr. Doolittle stories. Unfortunatley this beast is far more

With the recent run up in interest rates, we suspect many banks are getting gored by this animal. Academics and the SEC notwithstanding, historically most banks managed their investment portfolios rather well. They kept their portfolios relatively short and liquid and, like most rational investors, they had a tendency to shorten up when rates were low and

This essay first appeared in the client newsletter Double Exposure, copublished by Smith & Crowley, a banking, finance, and advisory services to lengthen when rates were high.

As in any investment endeavor, some made mistakes and got hurt by being "long and wrong," and a few others played the losers' game of taking profits and letting the losses run. In the Darwinian sense, the market took care of these misfits.

Above all, the investment portfolio has always been. the industry's first line= of defense for maintaining and building liquidity.

Poor investment management was almost never the cause of severe bank problems, to say nothing of bank failures. It may have contributed to the problems of the savings and loans during the high interest rate period of 10 to 15 years ago, but the mismatch and interest rate risk problems resided primarily in the loan portfolios.

Poor credit quality has been the primary cause of death among financial institutions.

So, FAS 115 was the SEC's endeavor to fix something thatwasn't broken, and in the fervor of the S&L bailout, the lesser developed countries workout for the big banks, and the supposed Federal Deposit Insurance Corp. funding problem, the compromise was pushed through.

Today, however, banks are waking up to the drastic limitations in investment flexibility that have come with the rigid new system. The choices are somewhat like this:

* Classify the entire portfolio as "held for sale" and watch your capital rise and fall with the whim of the money and capital markets. Some major banks, including such fine companies as J.P. Morgan & Co. and Norwest, have chosen this route. The results for most: Despite credible earnings performances in many cases, book value has been going nowhere for the last several quarters. While this may not be desirable, consider the alternatives.

* Classify most of the portfolio as "held to maturity" and the rest needed for immediate liquidity as "held for sale." The catch is making. the correct decision about which securities to put in which bucket. In the fast-changing investment world, what guru knows which investments may become overvalued or suddenly take a quality or marketability nose dive, prompting a rational investor to sell?

With the recent sharp rise in interest rates, we suspect many bankers are rapidly moving up the learning curve concerning the traps lurking in their "held to maturity" portfolios.

Heaven help the banker who chooses to sell a "held to maturity" investment. AS things stand today in the initial implementation of FAS 115, the wrath of the U.S. government and the accounting profession immediately descends upon you.

With wrinkled lip and evident distaste, bank auditors use the word "taint" (as though you had just been infected with a social disease) when you suggest selling a few "held to maturity" securities. "You will taint the whole portfolio," they say.

In short, FAS 115 has put an accounting straitjacket on the prudent investment policies that have historically served the banking industry quite well.

Now bankers are forced to let their investment mistakes mount because the securities are in some "untouchable" part of the portfolio. It makes sense to no one I've met in the banking industry.

In the absence of rational SEC and. accounting rules, I think bankers have no prudent choice but to put all or most of their investment portfolios in the "held for sale" bucket and/or to do nothing more than roll very short maturities.

But clearly, the banking industry is laboring under constraints that represent nothing more than the triumph of rulemaking bureaucrats over investment rationality and sound business practices.

In the long run, we must hope that this form of nonsensical and arbitrary restraint will ultimately be removed.

Unfortunately, the nation's bankers have become too used to laboring under many arbitrary constraints. Perhaps they've lost the will to fight back.

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