The tide turns on mark-to-market

The banking industry has been fairly relentless in its efforts to overturn the mark-to-market rules that investors have so dearly embraced. Success at last: The FASB has voted to allow more leniency in applying FAS 157, allowing for the use of computer models and judgment. This will result in lower losses due to toxic asset valuations, and improve their capital positions substantially. 

This move seemed fait accompli ever since Financial Accounting Standards Board Chairman Robert Herz appeared before the House Financial Services Subcommittee, where he was roughed up pretty thoroughly. He was ultimately all but forced to promise some sort of new guidance on FAS 157 that would be more to the industry's liking.  

For top banks, this is a huge victory. According to some estimates, bank earnings will rise by about 20 percent. Big troubled banks, such as Citigroup, stand to benefit the most.

But the new guidance on mark-to-market has come with lots of controversy. Obviously, investor advocates are dismayed, as are a host of others who feel that the public is getting short shrift. "The financial institutions and their trade groups have been lobbying heavily," Herz told Bloomberg after the hearing. "Investors don't lobby heavily." Goldman Sachs, to be fair, has been one of the few banks to support mark-to-market accounting.  

Arthur Levitt, former SEC chairman, has been pretty vocal in his opposition to the move. He says the new rules would allow banks "to obscure--some might say bury--the full extent of impairments on many of the bad loans and investments they made and securitized over the past few years." To many, it's only logical that investors be given an idea of what securities would fetch if they were sold, especially if the securities were held for sale or if they fund themselves with short-term securities. As for securities rendered illiquid, there was already some new guidance put out by the SEC that allowed for consideration of more inputs and judgment other than the last sale price. That doesn't seem far from what the FASB has proposed. All in all, politicizing accounting rules may not be a wise route. 

There are likely to be some unintended consequences. For one thing, Bloomberg notes that the plans to make it easier to manage toxic assets might help banks at the expense of the Treasury's troubled asset program, which aims to induce banks to get them off their books. - Jim