Mark-to-market rule set to lose a few teeth
U.S. accounting rulemakers are set to crumple on Thursday in the face of ultimatums from lawmakers, liberalizing rules that will give banks leeway to report smaller losses and asset writedowns.
The Financial Accounting Standards Board is expected to vote in favor of a proposal giving financial firms more flexibility in how they use the mark-to-market accounting rule, which has forced banks to record billions of dollars in lower values for assets.
A second proposal addresses when companies are required to take write downs on impaired assets and would allow banks to record smaller losses on their income statement.
Supporters of the changes argue that forcing banks to mark assets to firesale prices during a time of inactive markets has exacerbated the financial crisis through the writedowns, big earnings hits, damage to capital ratios, and a reduced ability to lend.
But investors say the changes will help big banks conceal the real value of toxic assets and say FASB was bullied by Congress as a way to prop up the economy in the short-term.
If FASB goes ahead with the proposals, capital markets will remain closed to major banks and other financial intermediaries for an extended period of time, said Patrick Finnegan, a director with the CFA Institute, whose members include portfolio managers, investment analysts and advisors.
Investors will not be willing to commit capital to firms that hide the economic value of their assets and liabilities, Finnegan said.
FASB is an independent standard setter. But with banks reporting billions of dollars in writedown, the economy in a tailspin and millions of Americans losing their jobs, Congress pressured FASB to relax the accounting rule in the belief it would help fix banks and the country's financial problems.
Previous guidance from FASB that banks were not required to use firesale-type prices was judged inadequate.
At a mid-March hearing, lawmakers told FASB Chairman Robert Herz to move quickly on new guidance or Congress would pass legislation to loosen the rules, which would threaten FASB's independence.
Four days later FASB issued the two proposals.
Unfortunately, the FASB has become a puppet for Congress and the regulators, as they undo decades of work that provided investors with more timely information on banks assets, said Lynn Turner, a former chief accountant at the U.S. Securities and Exchange Commission, which enforces accounting rules.
This is not the first time Congress has interfered with FASB's standard-setting process.
In 1993, FASB was about to propose that companies expense their stock options, a form of compensation heavily used by tech companies. However, then-SEC Chairman Arthur Levitt acquiesced to demands from Congress and Silicon Valley executives and told FASB to back off -- a decision Levitt has since called a mistake.
After the Enron accounting scandal and when the technology bubble burst at the start of this decade, FASB adopted its options rule.
HELP OR HINDER?
The mark-to-market accounting rule, which requires assets to be valued at what they would fetch in a current market transaction, has galvanized investors and the business community.
Dozens of industry groups such as the American Bankers Association, the U.S. Chamber of Commerce and the Mortgage Bankers Association have pressed FASB and the SEC to allow more flexibility in valuing toxic assets in now-illiquid markets.
We have been involved in a financial crisis for over 18 months, which has made it increasing difficult to value assets and those problems have had severe impact on the economy, said Thomas Quaadman, the U.S. Chamber of Commerce's executive director for reporting policy.
If FASB does not finalize its proposals, Quaadman said, there would be continued uncertainty in the markets that will postpone meaningful attempts to resolve the financial crisis.
Under FASB's proposal, financial firms could exercise more judgment in determining if a market for an asset is inactive and if a transaction is distressed. Banks could also rely more on cash flow models to set the price of an asset, generating a higher price than what the market is currently offering.
As there is little demand for banks' toxic assets, such as those linked to mortgages, firms have been forced to mark them down to artificially low prices when some of the underlying loans are still performing.
Bankers and many lawmakers contend that the strict interpretation of the mark-to-market rule is hindering the government's efforts to heal the banking system.
Success of the Obama administration's new federal lending program for asset-backed securities and a public-private investment partnership hinges on buyers and sellers feeling comfortable with the value of the assets.
Those skeptical of the proposed accounting rule changes are equally adamant the alterations will not help.
We still know the 'stuff' is on the balance sheets and if the financials are actually allowed to adjust capital based on unreal marks then who will ever buy financials again - how can you trust them? asked Tim Backshall, chief strategist at Credit Derivatives Research in a recent research note.
(Additional reporting by Al Yoon and Jennifer Ablan in New York; Editing by Tim Dobbyn)
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