‘Mark to market’ accounting should stay, SEC report says

This article was originally on a blog post platform and may be missing photos, graphics or links. See About archive blog posts.

Bankers who’ve been seeking Congress’ help to suspend ‘mark to market’ accounting rules lost a battle today: The staff of the Securities and Exchange Commission recommended in a report that mark-to-market rules should be maintained, although ‘improved.’

The report had been ordered up by Congress in October as part of the financial-system bailout.

The banking industry asserts that mark-to-market, or fair-value, accounting worsened the financial crisis. The rules require require financial institutions to value securities on their books at current market prices, even if the securities don’t mature for many years.

Bankers say that has unfairly ravaged their balance sheets because, they say, market values of mortgage-related securities have been unrealistically depressed, reflecting the massive uncertainty over the housing market.

Some House Republicans, and a few Democrats, have wanted to suspend mark-to-market accounting altogether. That would allow banks to affix much higher values to mortgage debt. As I’ve noted previously, accounting purists say that would lead to fantasyland valuations, misleading investors.

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

The new SEC report, compiled by the agency’s office of the chief accountant and division of corporation finance, makes the case that ‘fair value accounting did not appear to play a meaningful role in the bank failures that occurred in 2008.’ Instead, ‘Bank failures in the U.S. appeared to be the result of growing probable credit losses, concerns about asset quality, and in certain cases, eroding lender and investor confidence,’ the SEC says in a summary.

Of course, investor confidence was eroded in large part by the massive write-downs banks took on mortgage-related securities.

The SEC report recommends improving mark-to-market rules, including via ‘the development of additional guidance for determining fair value of investments in inactive markets,’ such as in situations where market prices are not readily available.

That described the market for mortgage securities for much of this year, as buyers evaporated.

Charles Mulford, an accounting professor at the Georgia Institute of Technology, told Bloomberg News that the SEC report recommends ‘no significant change in current accounting, and that’s a good thing. It’s not changing how we’re doing things, just clarifying them.’

A summary of the SEC report is here. The full report is here.

-- Tom Petruno