Mark-to-market rule compromise is on the way Various alternatives are under discussion on Capitol Hill, SEC and FASB By Ronald D. Orol, MarketWatch Last update: 6:09 p.m. EDT March 11, 2009 Comments: 71 WASHINGTON (MarketWatch) -- The Republican Study Committee, a group of conservative GOP lawmakers, believe that instead of pumping billions to bail out banks, lawmakers could save the economy by simply eliminating controversial mark-to-market accounting rules, which require daily revaluing of assets. The panel's effort failed last year as Congress approved $700 billion for banks in October. However, seven months later, their efforts seem to be advancing on Capitol Hill. Indeed, even fierce opponents to changing the methodology are now beginning to think about some mark-to-market alternatives. As the markets continue to slide, pressure is building in Washington to find a bipartisan consensus on the issue. The first step is a hearing Thursday, hosted by House Securities Subcommittee Chairman Paul Kanjorski, D-Penn. Kanjorski argues that the standards have proven "problematic" for banks' illiquid assets. Officials from the Securities and Exchange Commission, Office of the Comptroller of the Currency and Financial Accounting Standards Board are scheduled to testify. Former FASB chairman William Isaac, a key early opponent of mark-to-market, will testify. Also known as "fair value rules," mark-to-market is an accounting methodology that requires banks and other corporations to assign a value to an asset, such as mortgage securities, credit-card debt or student-loan investments, based on the current market price for either the security or a similar asset. Proponents of abolishing or modifying the rules say that assets owned by troubled banks have become impossible to value, as the market for these assets have frozen up due to the financial crisis. Uncertainty about what banks such as Bank of America (BAC: bank of america corporation com News , chart , profile , more Last: 4.93+0.14+2.92% 4:01pm 03/11/2009 Delayed quote data Add to portfolio Analyst Create alert Insider Discuss Financials Sponsored by: BAC 4.93, +0.14, +2.9%) and Citigroup Inc. (C: Citigroup Inc News , chart , profile , more Last: 1.54+0.09+6.21% 4:00pm 03/11/2009 Delayed quote data Add to portfolio Analyst Create alert Insider Discuss Financials Sponsored by: C 1.54, +0.09, +6.2%) , are worth, they argue, is at the core of the financial crisis. Changing the accounting methodology, even if it is done for a temporary period of time, would restore confidence in banks and result in more lending by financial institutions, they say. In short, a modification of the rules would be the big first step needed for the economy to turn around, they say. "Many of these oddball investments are not being traded at all," said Willis Riccio, senior counsel at Looney & Grossman LLP in Boston. However, opponents of any changes contend that the rules are necessary because shareholders deserve to understand the troubled state of financial institutions and any changes could result in fraud and manipulation. Alternative options It is unlikely that legislators will eliminate the rules outright. Both the SEC and FASB are opposed to its elimination, as is Federal Reserve Chairman Ben Bernanke. Nonetheless, Bernanke, Kanjorski and House Financial Services Committee Chairman Barney Frank, D-Mass., argue that improvements are necessary. "There has to be more flexibility in its application," Frank said. Lawmakers are considering a wide variety of options. One alternative would be to allow banks to develop a model and analysis of what they believe their illiquid assets are worth and what they forecast the securities will be valued in the following quarter. In this approach, a bank must also explain the asset's value if sold today, said Brian Battle, vice president at Performance Trust in Chicago. One hypothetical scenario: A bank produces analysis and documentation that its asset is worth $80, its value will be $90 next quarter and it can get $50 in the market today. Analysts and investors would become more or less confident in a bank's asset valuations, as it becomes clear whether or not they meet these estimates. "Some banks will become known as sandbaggers while others would be perceived more favorably because they met their modeled forecasts," Battle said. However, critics argue that many retail investors aren't sophisticated enough to make investment decisions based on complex intrinsic value analysis. One proposal introduced by the U.S. Chamber of Commerce would allow banks to split mortgage losses between credit and liquidity losses. With credit losses, a bank would have no expectation that borrowers would pay up, and in this scenario, all of the asset would be written off and removed from the balance sheet. But with liquidity losses, where there is an expectation for repayment, losses wouldn't be recognized on the balance sheet until the asset is sold.
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