U.S. rulemaker eases mark-to-market's bite

NORWALK, Connecticut Thu Apr 2, 2009 6:56pm EDT

Pedestrians are reflected in the glass side of the John Hancock Tower in downtown Boston, March 31, 2009. The John Hancock Tower, one of Boston's most distinctive buildings, was sold in a foreclosure auction for $660.6 million on Tuesday, about half the price its owners paid just three years ago. REUTERS/Brian Snyder

Pedestrians are reflected in the glass side of the John Hancock Tower in downtown Boston, March 31, 2009. The John Hancock Tower, one of Boston's most distinctive buildings, was sold in a foreclosure auction for $660.6 million on Tuesday, about half the price its owners paid just three years ago.

Credit: Reuters/Brian Snyder

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NORWALK, Connecticut (Reuters) - U.S. accounting rulemakers bowed to congressional and financial industry pressure on Thursday by allowing more flexibility in valuing toxic assets, a move expected to boost bank earnings and improve their capital levels.

The five-member Financial Accounting Standards Board voted unanimously to let banks exercise more judgment in using mark-to-market accounting that has forced billions of dollars in writedowns and been blamed for worsening the recession.

But the board split 3-2 on backing guidance that would let lenders take smaller losses on impaired assets such as mortgage backed securities, a move critics said would let banks hide reality from investors.

The accounting changes were credited with helping U.S. stock rally for a third day, by supporting optimism the financial sector will stabilize in the short term.

Many lawmakers, banks and other supporters of the changes argue that pricing assets to firesale prices during a time of inactive markets has exacerbated the financial crisis through the writedowns, big earnings hits, damage to capital ratios, and a reduced ability to lend.

Investors and some former regulators take a different view, saying that more flexibility with the rules would let big banks hide the real value of their troubled assets.

"I think it's a mistake. If it's too cold in the room, you don't fix the problem by holding a candle under the thermometer," William Poole, former Federal Reserve Bank of St. Louis president, told Reuters at a conference in New Orleans.

"It may increase reported bank earnings by 20 percent, but it has nothing to do with the reality of bank earnings. It's very important to maintain that distinction," Poole said.

Initial euphoria among business lobbyists over the changes was tempered as it became clear FASB would not let banks presume that all transactions within a market are distressed just because a market for an asset is inactive.

"FASB has taken one step forward and one step back," said Thomas Quaadman, executive director for reporting policy at the U.S. Chamber of Commerce.

The changes would take effect in the second quarter for most U.S. financial firms, but early adoption could be allowed for first quarter results. The guidance documents should be issued next week, FASB staff said.

FASB SPLIT ON WRITEDOWN

FASB deliberated for three hours in a drab boardroom that was filled with dozens of representatives of accounting firms, banks and insurance companies. "I think this is an improvement," FASB Chairman Robert Herz said of the changes.

But board members Marc Siegel and Thomas Linsmeier cast dissenting votes on the guidance for how companies write-down assets that have dropped significantly in value.

"I'm afraid that this change will result in fewer impairments being recognized, and I don't think that will help the investor confidence in the balance sheet," Siegel told the meeting.

FASB said at its meeting that the objective of mark-to-market in inactive markets should be to determine what an asset could fetch in an "orderly" transaction between market participants. Such an "orderly" transaction would not include distressed transactions or fire-sales, it said.

A Congressional panel last month told Herz to move quickly to ease the mark-to-market guidance or lawmakers would take action. Four days later FASB issued two proposals: one to give banks more flexibility in applying mark-to-market accounting and another addressing when banks must take writedowns on impaired assets.

SCRUBBING TOXIC ASSETS

FASB's new guidance could affect a federal lending program for asset-backed securities and a public-private partnership to purchase troubled assets unveiled in March by the White House.

The Obama administration's plan to scrub toxic assets off banks' balance sheets depends heavily on banks' and potential investors' ability to agree on a value for an asset.

Robert Willens, a tax and accounting analyst, said if a bank gets to write up the value of securities in its available-for-sale portfolio, to levels beyond what potential bidders are wiling to pay, there could be a problem.

"Banks will be unwilling to sell these assets (into the government's Public-Private Investment Program) because they would have to record a loss. It could have a perverse impact on the whole process."

But the Financial Services Roundtable, representing big financial companies, disagreed.

"It would help the toxic asset purchase program for mortgage securities by creating a market value for those securities, which will narrow the difference between buyers and sellers," said Scott Talbott, the roundtable's senior vice president for government affairs.

The accounting board considered hundreds of letters and e-mails sent by banks, investors and others commenting on the FASB proposals.

Herz also said FASB "did extensive outreach to investors, particularly major investors in financial institutions" ahead of Thursday's meeting.

But FASB members Linsmeier and Siegel sparred over whether to call the writedown guidance "ridiculous" or "ludicrous," and Linsmeier said the board was making changes to address regulatory capital concerns.

"I find one of the most unfortunate parts of this to be the fact that we're continuing to take the responsibility on, rather than having the regulators to take this on," said Linsmeier, a FASB member for three years and former chairman of Michigan State University's accounting department.

Siegel joined the board in October. He had led an accounting research and analysis team at RiskMetrics Group that focused on investor-oriented issues.

(Additional reporting by Emily Chasan and Rachelle Younglai in Washington, Joseph Giannone in New York, Michael Erman and Paritosh Bansal in New Orleans; editing by Tim Dobbyn)

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