Congress Gives U.S. Official 3 Weeks to Revise Mark-to-Market Accounting

By and | March 13, 2009

Lawmakers told the top U.S. accounting rulemaker to deliver new guidance on mark-to-market accounting within three weeks, or face legislation changing the rule that has forced banks to write down billions of dollars in assets.

Financial Accounting Standards Board Chairman Robert Herz, under a barrage of questions, initially committed to the three-week timetable but later said he would have to consult with other board members.

“I will take back a very clear message from today,” Herz told the U.S. House capital markets subcommittee. “We’ll do everything that we can.”

SEC Reponse
The Securities and Exchange Commission’s acting chief accountant, James Kroeker, told lawmakers “we can absolutely work with the FASB within that timeframe.”

The accounting rule, which requires assets to be valued at current market prices, is defended by investor advocates but the banking industry has pleaded for a suspension or modification of the rule.

Critics contend the rule is unnecessarily destroying banks balance sheets because banks have to write down their assets to fire-sale prices, even when they plan to keep the assets.

Frustrated by the slow pace of accounting rulemaking, lawmakers said Congress would take action if necessary.

“If the regulators and standard setters do not act now to improve the standards, then the Congress will have no other option than to act itself,” said Rep. Paul Kanjorski, the chairman of the subcommittee.

FASB Standards
FASB was created to be an independent body and sheltered from political whims but in practice has frequently faced congressional pressure. The SEC enforces and helps interpret FASB’s standards.

In September last year, the SEC reminded financial firms that they did not have to use fire-sale prices when evaluating hard-to-price assets.

But with little demand for assets, such as those linked to subprime mortgages, banks contend they have had to use the lowest price the asset could fetch in the market.

FASB’s upcoming guidance, which it has been working on for months, is expected to address how financial companies can classify when a market for their assets is active or inactive and what data should be considered when identifying a distressed sale.

Herz also told lawmakers that the accounting board may have to give firms more examples of the using the cash flow generated by securities to arrive at a valuation.

Fair Value Accounting
Views on mark-to-market, also known as fair value accounting, ranging from support to passionate opposition.

Former Federal Deposit Insurance Corp. Chairman William Isaac told the subcommittee there was nothing fair about the “misleading and destructive accounting regime.”

Isaac, now chairing the Secura Group financial institutions consulting firm, said the accounting rule had destroyed well over $500 billion of capital in the U.S. financial system and over $5 trillion of lending capacity.

Institutional Investors
But Council of Institutional Investors’ general counsel, Jeffrey Mahoney, said his members believed the existing mark-to-market standards increased the quality of information and better reflected current economic reality.

Kanjorski, a Democrat from Pennsylvania, warned FASB and the SEC that there were several bills on mark-to-market pending in Congress. “I guarantee you that one of those pieces of legislation is going to become law before early April.”

He set a further hearing for mid-April to monitor progress by FASB and the SEC.

Rep. Spencer Bachus, the top Republican on the full Financial Services Committee, said action was long overdue. “If FASB and the SEC refuse to use their authority to provide useful and timely guidance, this Congress may have no choice but to act in their place,” said Bachus, from Alabama.

Bank Capital
Asset writedowns under mark-to-market have forced banks to scramble to meet minimum capital standards set by bank regulators. That in turn can mean less money to lend to help revive the economy.

Kanjorski and other lawmakers urged banking regulators to consider offering some leeway in capital adequacy requirements.

Some business groups, such as the U.S. Chamber of Commerce, want a mark-to-market modification that would split the writedowns into credit and liquidity losses.

Credit losses occur when a borrower no longer has the ability to repay a loan and requires a lender to immediately recognize the loss.

Liquidity losses are potential losses and there is an expectation that a borrower will still be able to repay the loan. Those losses are not recognized until the asset is sold.

Currently, writedowns in assets such as mortgage-backed securities are recorded as credit losses, which some critics say is misleading, since some of the loans within the mortgage-backed security are still performing.

(Reporting by Rachelle Younglai, Karey Wutkowski; Editing by Tim Dobbyn)

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