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Mark-to-market accounting stays, albeit ‘clarified’

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Mark-to-market accounting will remain the standard for the banking industry’s books: The financial-system bailout signed into law by President Bush today won’t require that the Securities and Exchange Commission suspend mark-to-market rules, as some House conservatives had wanted.

Instead, the House went along with the Senate’s language on the issue, giving the SEC the authority to suspend the rules, but not mandating the move.

As noted in this previous blog post, the banking industry has been agitating against mark-to-market rules, which require financial institutions to value securities on their books at current market prices. Many bankers assert that the rules have unfairly ravaged their balance sheets because, they say, market values of mortgage-related securities are unrealistically low, reflecting the massive uncertainty over the housing market.

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Under political pressure, the SEC and the Financial Accounting Standards Board eased up on the rules in a ‘clarification’ issued Tuesday. The change may allow banks to avoid further huge write-downs of mortgage assets. That was enough to satisfy House conservatives, for the moment.

But we haven’t heard the end of this.

The bailout law requires the SEC to conduct a study of mark-to-market accounting, assessing the effects on banks’ finances. One question Congress wants addressed is ‘the impact of such accounting on bank failures in 2008’ -- in other words, are the bookkeeping rules hastening the demise of banks without good reason?

Congress wants the study completed in 90 days.

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