ACTUAL TITLE
"Accounting rule change could end bank crisis, or make it worse"
The little-known Financial Accounting Standards Board (FASB) is poised to deliver today a change in accounting rules that proponents say will save the banking system — and opponents warn could bring even more ruin to the U.S. economy.
link for more detail:
(FASB 157) http://www.fasb.org/st/summary/stsum157.shtml
By Kevin G. Hall
McClatchy Newspapers
WASHINGTON — The little-known Financial Accounting Standards Board (FASB) is poised to deliver today a change in accounting rules that proponents say will save the banking system — and opponents warn could bring even more ruin to the U.S. economy.
The FASB is expected to relax the rules on how banks value assets that investors no longer are willing to purchase.
Current rules require banks to list the value of assets on their books at their current market price — a practice called "mark-to-market." The assets, however, at the center of the global financial meltdown — securities backed by bad mortgages — have no market. Investors simply won't touch them.
That's forced banks to lower the reported value of their assets, and quarter after quarter since mid-2007, they've had to write off more and more losses. That forces them to hoard their capital, rather than lend it, to offset their losses. That's how the housing crisis begat the banking crisis, which begat the U.S. economic crisis, which begat the global financial meltdown.
Banks say the mark-to-market accounting rule has worsened the financial crisis by making institutions appear weaker than they really are. The pools of mortgages, they say, should be valued not on what they're worth today, but what they are expected to be worth at maturity.
"Why should all assets be treated as if they're really for sale?" asked Bert Ely, a banking expert who gained wide recognition during the savings-and-loan crisis of the late 1980s.
During the S&L crisis, government regulators initially eased federal accounting rules for troubled S&Ls, which hid their negative worth and allowed them to make even worse decisions that led to their collapse and an expensive federal rescue.
Could it happen again?
Enter FASB. The Norwalk, Conn., private-sector entity adopts common standards that are accepted by regulators such as the Securities and Exchange Commission (SEC).
FASB moved with breakneck speed to consider the rule change after its chairman, Robert Herz, was roughed up by lawmakers on March 12 and warned that Congress could impose new rules if he wasn't willing to do so. Democrats, led by Massachusetts Rep. Barney Frank, the chairman of the House Financial Services Committee, insisted on the change.
FASB is expected to relax mark-to-market rules, sometimes called fair-value accounting, to recognize the maturity value of the mortgage securities often referred to as toxic assets.
Supporters think this will provide a tremendous boost to banks and ease the economic crisis.
"I think change in mark-to-market (rules) would make a big difference. If there's a bottom spotted on the economy, then the banking thing goes away. As soon as Wall Street sees a bottom, then you can make accurate forecasts. When you can do that, the banking crisis ends," said James Paulsen, chief investment strategist for Wells Capital Management, a subsidiary of Wells Fargo. "That's equivalent to a huge toxic asset (being lifted) because you bring private investors back in."
The rule change could allow banks to use one accounting standard for what it reports to the SEC, whose mandate is investor protection, and a more relaxed standard for reporting to banking regulators. That would ease the demand on banks to raise more capital in a distressed environment.
Critics think the change would allow banks to cook their books by hiding their truly bad assets behind longer maturity dates.
"The biggest problem with mark-to-market isn't mark-to-market, it's what part of the balance sheet is mark-to-market and what part is not," said Franklin Raines, the former chief executive of mortgage-finance giant Fannie Mae. If FASB relaxes the rule for distressed bank assets, he said, "You have got a distortion in the balance sheet that nobody can understand."
The changes would allow banks to revise their first-quarter 2009 reports to reflect a hold-to-maturity value on assets that no investor will buy now. Some advocates have proposed allowing this change to apply retroactively to the dismal last quarter of 2008, and perhaps even further back.
The change has been debated from the very start of the financial crisis in mid-2007, so action now raises eyebrows.
"It's an awkward time to do it," said David Wyss, chief economist for the credit rating agency Standard & Poor's in New York. He said it gives the appearance of sweeping problems under the rug.
The action could add more uncertainty, warned Gary Stern, the president of the Federal Reserve Bank of Minneapolis.
"I think it would raise as many problems as it answers," he told McClatchy Newspapers.
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