Banks and allies want 'immediate' fix to accounting rules

The big guns came out blazing today in the battle over "mark-to-market" accounting.

In a letter to the leadership of the House Financial Services Committee -- which will hold a hearing Thursday on mark-to-market rules -- 31 industry groups and financial institutions called for "immediate action" to halt the "spiral of accounting-driven financial losses."

In other words, end mark-to-market as it is now broadly applied to the banking industry.

The letter’s signatories included the American Bankers Assn., the Independent Community Bankers of America, the Mortgage Bankers Assn. and the U.S. Chamber of Commerce.

Thursday's hearing will be chaired by Rep. Paul Kanjorski (D-Pa.), who heads the Financial Services Committee's capital markets subcommittee.

For the last year, the banking industry has asserted that mark-to-market, or fair-value, accounting has worsened the financial crisis by forcing banks to drastically write-down the value of many mortgage securities they hold.

The Financial Accounting Standards Board’s rules basically 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. As banks’ balance sheets have deteriorated, so has their ability to lend, they say.

The groups writing today to Financial Services Committee Chairman Rep. Barney Frank (D-Mass.) and to ranking Rep. Spencer Bachus (R-Ala.) demanded that Congress "correct the unintended consequences" of market-to-market accounting. . . .

From the letter:

"Let us be clear, real economic losses should be recognized and are necessary for orderly markets. However, the recognition of losses that do not have a basis in economic reality is unsustainable in any environment. Appropriate changes in mark-to-market accounting should not wait until mid-year or year-end. This will only allow the spiral of accounting-driven financial losses to continue."

Investor groups and others that oppose tinkering with mark-to-market rules fear banks would choose to value mortgage securities at unrealistically optimistic levels, misrepresenting the quality of their balance sheets.

The witness list for the hearing Thursday hasn’t yet been posted. I’ll put it on the blog as soon as I see it.

As I noted Friday, two congressmen last week introduced a bill to create a new federal board to review the "application" of accounting principles dictated by the FASB.

-- Tom Petruno

Photo: Rep. Paul Kanjorski (D-Pa.). Credit: Haraz N. Ghanbari / Associated Press

Comments

[Rick Raphael]

I hope we can get a strong, positive bi-partisan response on this at the hearing Thursday. Warren Buffett today said that the mark to market valuation of banking assets is extremely undervalued. If they are undervalued then the banks should hold them to maturity without the penalty of mark to market accounting rules. That's good for the banks and good for the taxpayer. Why?
Even modest modifications of these rules could eliminate the necessity for the Fed and the Treasury Dept. to take over these assets (as in the "bad bank" scenario). That would keep billions off of the government's balance sheet at a time when the balance sheet is ballooning.
It's also good for the banks because if we allow the banks to book the assets to maturity (as they were written when purchased) it increases their capital position and further, makes it easier for them to raise capital and increase lending without more government intervention.
Forcing banks to mark their long term holdings to prices that can only be realized at today's fire sale prices undermines the entire concept of banking, i.e., banks buy long term assets and borrow from short term depositors to pay for the assets.
"Mark-to-market accounting existed in the Great Depression, and according to Milton Friedman, who wrote about it just 30 years after the fact, it was responsible for the failure of many banks.
Franklin Roosevelt suspended it in 1938, and between then and 2007 there were no panics or depressions. But when FASB 157, a statement from the Federal Accounting Standards Board, went into effect in 2007, reintroducing mark-to-market accounting, look what happened." Quoed from Wesbury and Stein, Forbes 2/26/09, "Why Mark to Market Accounting Must Die".

[mr.bilko]

Mark-to-market is something that accountants, economists, politicians and college professors love. In the real world, mark-to-market does not factor in the quality of borrower. It fails to distinguish between the 90% who are paying on time versus the 10% who are delinquent.

The basic premise of mark-to-market is: "What if we had a 100% foreclosure rate on our loans. What could we expect to recover if everyone defaulted on their mortgages?"

[Johan Gest]

I strongly believe the mark-to-market accouting should not be changed. This
is the only fair and square method for valuing an asset , without any prejudice, future crystal ball-like estimation that ends up just fooling regulators and consumers alike. So what if someone thinks the assets are undervalued ? that's a private assessment that has no relation to what it's current value is. Someone else could just as easily think it's overvalued.
Banks should buy assets as if it was buying a car, at market prices, and
value the asset accordingly from the very beginning. The fact that banks are tanking when all other economic sectors are also failing, is what should be expected from a rational economic standpoint. I'd be completely amazed and find it ridiculuous that banks are completely healthy and unscathed from a depression just because their assets are based on conditions 50 years to the future! If nothing else , mark-to-market accounting must be strengthened, not ended.

[Tim]

"Investor groups and others that oppose tinkering with mark-to-market rules"

These so called "Investor groups" have to be Hedge Funds or Shorts.

[Tom Petruno]

@Tim: If you click on the hyperlink, you'll see that the groups opposing changes to mark-to-market accounting are the Center for Audit Quality, the Council of Institutional Investors (major pension funds) and the Chartered Financial Analysts Institute. Hedge funds and short sellers may be opposed, but they aren't part of that coalition.

Tom Petruno

[Tim]

Mr. Petruno thanks for the information and correction. I want to also thank you for a well written and informative news article on an extremely important issue.

[Mani]

According to Mark-to-Market is very absurd. There should be something in between to valuate an asset. If an asset’s value is not based on its intrinsic value but at the price you can sell, then in this market you can break its value to near zero. It is an opposite of a monopolistic trade. Here there is no protection for the seller. A bad bank plan is the way to go here. It will not only protect the seller, but also start adding value to the asset in the market.

[abe mawven]

why these bankers start to attack M2M rules now? they have pump their stocks when M2M work for them. If they want tpeople to see their optimistic estimation, at least it should be required provide the pessimistic estimation (M2M) at the same time. So that will give investors a fair picture.

[Roy T.]

Mr. Petruno notes that those who oppose changing the FAS 157 rule include the Center for Audit Quality, and Chartered Financial Analysts Institute among others. These are professional accounting associations and the 5 members of the FASB who wrote the rule are all employed by accounting firms. Their overwhelming collective interest is protecting themselves from the plaintiff's bar and lawsuits. They all live in quiet fear over what happened to Arthur Andersen. Their primary motivation for reinstating this massively destructive and irresponsibly deployed rule (FAS 157) was to be able to blame the market for valuations rather than themselves if an investment went bad. They effectively sold the entire world economy up the river to cover their own you know whats.

[Tom Petruno]

@RoyT: I am sure you are right that, among accountants, there is a CYA mentality about mark-to-market. My hope is that there can be some kind of compromise that doesn't surrender portfolio valuations to a mark-to-make-believe environment, but also addresses some of the legitimate concerns of mark-to-market opponents. The political heat is so high on this now, I don't believe FASB can beat it back.

That said, it is ALWAYS dangerous when politicians decide they're the best people to dictate accounting principles.

Tom Petruno

[Antoinette Boulet]

I think the mark-to-market accounting rules should stand because I do not agree that the current market is causing a false deflation of real estate market values. Rather, the banks made loans on falsely inflated market values in previous years. Therefore, the write downs are justified. Changing the rules would allow banks to go on making the sort of poor business decisions that got the whole country into this mess in the first place. Congress ought to JUST SAY NO to whining and complaining bankers!

[Reologist]

Bravo, Antoinette... M2M is certainly NOT the problem.

[Bobz]

M2M seems to be perceived as a "magic bullet" by the banking industry which seems strange given that we already have wide latitude in pricing level 3 assets which are the real culprits here. I don't pretend to be an expert on M2M but then the talking heads on CNBC and other financial channels seem to have a simplistic view of the issue also. I'm inclined to view our current ecnomic calamity on real problems and not arcane accounting rules. This same thinking seems to apply to the "uptick" rule, which will not prevent short selling by much. One of the problems of investing is trying to separate investment facts from political ideology which seems to have crept into the investment world. There is no escaping the fact that banks got themselves into this jam, and why in the world are we bailing out Citibank yet again? They are bad apples and should have been taken over and sold off years ago by the FDIC.