To help banks, some suggest rewriting accounting rules
The increasingly angry debate over "mark-to-market" accounting rules for banks may be coming to a head.
All year, many bankers have asserted that it was unfair that accounting standards required them to value mortgage securities they own at market value. The frazzled market, they said, was unrealistic about the long-term worth of those assets.
Markdowns of mortgage assets have, of course, devastated the finances of leading banks.
Some in Congress who agree with the banks now want to suspend mark-to-market accounting altogether and give lenders much more leeway in valuing mortgage securities at levels that, in theory, more realistically reflect what the assets will return over time.
Accounting purists say a rule change would raise the risk that the banks would resort to fantasy accounting -- "mark-to-make-believe" -- that would overstate the value of their assets to investors. Remember Enron Corp.?
The first version of the $700-billion financial-system bailout bill in the House included a passage giving the Securities and Exchange Commission authority to suspend mark-to-market accounting in specific instances in which the agency "determines that it is necessary or appropriate in the public interest and is consisent with the protection of investors."
Some House Republicans are pushing harder to change the rules. The Republican Study Committee, a group of House conservatives, has proposed suspending mark-to-market accounting until the SEC "can issue new guidelines that will allow firms to mark these assets to their true economic value." These conservatives' votes could be crucial in the next go-round of the bailout bill.
Former House Speaker Newt Gingrich, now a fellow at the American Enterprise Institute, on Monday published a piece on Forbes.com entitled "Suspend Mark-to-Market Now!" Read it here.
On the other side of the debate are many accounting experts and investor advocates. They say it would be folly to give banks more discretion in deciding how to value assets simply because they don’t like what the market is telling them.
The Center for Audit Quality, an advocacy group for the accounting industry, issued a statement today urging Congress to reject any suspension of mark-to-market rules.
"The principles of mark-to-market accounting are rooted in the fundamental virtue of transparency and are central to informed market decisions and efficient allocation of capital," the group said. "In our view, investor confidence would be undermined by efforts designed to mask the actual value of financial assets at a given point in time."
Mark-to-market accounting "did not create the economic crisis," the group said. Rather, the rules have "contributed positively to revelations about the severity of the economic crisis facing our credit markets and certain institutions." Read the full statement here.
Under apparent pressure, the Financial Accounting Standards Board, which sets U.S. accounting rules, said today it would change the focus of its board meeting Wednesday to mark-to-market accounting issues.
What's more, the SEC, which oversees the FASB, looked as if it was trying to head off a full suspension of mark-to-market rules with "clarifications" it published today.
The new SEC guidelines, issued jointly with the FASB, give financial firms more latitude in deciding on valuations for securities when there is no "active market" for the assets -- which certainly describes many mortgage securities.
But the agency "probably will resist calls" for a blanket moratorium on mark-to-market rules, Bloomberg News reported today, citing sources familiar with the debate.
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