With the new Market to Market rules news now out, the question is whether what the big bank defenders hoped for will actually help. The contrarian view is that M2M changes will do nothing and may in fact stall the rally. Why? The rules will effectively make Geithner’s plan a no go. So who is in charge here? FASB or Geithner?

From a recent AP News Story:

In an ironic twist, the new leeway for banks could undercut the government’s new financial rescue program in which it is joining with private investors to buy up about $500 billion in toxic assets from banks, some experts say. The fear is that companies will use the leeway to boost the value of the assets on their books to “unrealistic levels,” Robert Willens, an expert on tax and accounting issues for Wall Street clients, told The Associated Press last week. “The FASB’s relaxation of these rules might come at the most inopportune time,” he said.

In the short run, banks would benefit by raising the value of the assets. But higher values could drive away prospective private investors — who don’t like to overpay, even though the government will absorb most of the risk. If the assets remain on banks’ books, they may continue to be reluctant to lend as they fret over the assets’ future performance. That could work against the purpose of the government’s program: to break the logjam in lending and get the economy pumping again.

My bet: Now, after the massive rally in anticipation of this news, is probably a good time to short the banks again via the ETF’s. Phonying up financials, even with a government mandate, cannot possibly lead to a sustained recovery. Moreover, by making financial chicanery legal, the government has once again undermined the reliability of the market, at precisely the time when more truthful financial disclosure is sorely needed to regain investor trust. Finally, it’s difficult not to be shocked by the fact that the government can somehow allow completely contradictory financial rescue programs to operate simultaneously. The only logical conclusion: the government has absolutely no clue what they are doing.

Update: For a good take on the Market to Market debate, see this post at The Baseline Scenario.