“Mark-to-market” accounting fight goes down to the wire

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With the House vote looming on the financial-system bailout plan, proponents of ‘mark-to-market’ accounting rules are trying to beat back efforts in Congress to suspend the rules as part of the bailout.

The head of the Financial Accounting Foundation, which oversees the Financial Accounting Standards Board, on Thursday warned against ‘political interference’ with accounting rules -- although it’s clear this issue already has become seriously politicized.

‘We believe that once Congress starts setting accounting standards through its political process, the integrity of U.S. accounting standard-setting and the credibility of U.S. financial reporting will be dangerously compromised,’ wrote Robert Denham in a letter to House Financial Services Committee Chairman Barney Frank (D-Mass.).

Denham is a partner at L.A.-based law firm Munger, Tolles & Olson and a longtime advisor to billionaire Warren Buffett.

The people he really needs to reach are the conservative House Republicans who have been agitating to suspend mark-to-market standards.

Mark-to-market accounting requires financial institutions to value securities on their books at current market prices. Many bankers assert that the rules have unfairly ravaged the industry’s balance sheets because, they say, market values of mortgage-related securities are unrealistically low, reflecting the massive uncertainty over the housing market.

They have a point, of course. The market for mortgage paper is a mess, thanks to the Wall Street geniuses who created some of the most complex securities ever to be foisted on investors. Still, accounting standards already give banks latitude in figuring what hard-to-value assets are worth. The FASB and the SEC provided more latitude in rule ‘clarifications’ on Tuesday, in an obvious bid to head off more interference from Congress.

Some House Republicans, and a few Democrats, want to suspend mark-to-market accounting altogether. That would allow banks to affix much higher values to mortgage debt.

Accounting purists say that would lead to fantasyland valuations, misleading investors.

‘Suspending the proper accounting of this paper is the refuge of cowards,’ financial blogger Barry Ritholtz wrote in a strong defense of mark-to-market on Wednesday. ‘It reflects a refusal to admit the original error, it hides the mistake, and it misleads shareholders. I find it to be a totally unacceptable solution to the current crisis.’

The language in the bailout bill passed by the Senate on Wednesday gives the SEC the authority to suspend mark-to-market accounting for any type of security, but doesn’t require the agency to act. That was the same watered-down wording that was in the first House bailout bill -- wording that some anti-mark-to-market conservatives cited as one of the key reasons they voted against the bill.

SEC Chairman Christopher Cox is under heavy pressure from both sides. He’s supposed to meet on Friday with top executives of major accounting firms, Bloomberg News reported.

On Wednesday, groups representing the accountants, large pension funds and chartered financial analysts issued a joint statement declaring their unequivocal opposition to ‘any suspension of mark-to-market’ accounting.