Analysis: Battle on mark-to-market rules gathers steam

NEW YORK (Reuters) - Some are predicting the disappearance of jobs, many say they fear another banking crisis.

Letters pouring into the Financial Accounting Standards Board predict those shocks and more from the rule-makers' proposal to expand mark-to-market, or fair value accounting at U.S. banks.

Meant to give investors more up-to-date information about banks' financial condition, the proposal would require banks to put market values on all of their loans -- even those that they do not intend to sell.

Banks now value most loans based on historical costs, a measure critics say can become outdated. The new rule would be effective in 2013, though small banks could take four more years to comply.

The proposal, partly a response to the global financial crisis, has generated fierce opposition from banks, which fear it would reduce their reported capital and require them to increase reserves.

Banks argue this could discourage them from making some types of loans, hurting businesses, triggering more unemployment and harming an already fragile economy.

Cheered by the upcoming retirement of FASB Chairman Robert Herz, a mark-to-market proponent, opponents have stepped up their assault.

According to the American Bankers Association (ABA), a lobbying group for the $13 trillion banking industry, the change would bring about $6.67 trillion of bank loans under mark-to-market rules.

"Theoretically arrogant; in practice insane," wrote James Blaine, president of the State Employees' Credit Union in Raleigh, North Carolina.

"Do away with mark to market and bury it deep in the earth," wrote Matthew Van De Motter, a financial adviser in Pepper Pike, Ohio.

Mark-to-market critics, including members of Congress, blamed earlier tightening of fair value rules for intensifying the 2008-2009 financial crisis by triggering massive bank writedowns as prices of mortgage securities plunged.

Fair value proponents dispute those claims and say more market-based information just reveals riskiness already there.

KEY PROPONENT RETIRING

Herz, who is retiring at the end of the month, has long supported fair value accounting and argued that more transparent accounting could have provided an early warning to past financial crises.

A deciding factor when FASB approved a fair value draft in a 3-2 vote, Herz is being temporarily replaced by board member Leslie Seidman, who voted against the draft; a permanent chair has not yet been found. FASB staffer Russell Golden has been named to fill the fifth board seat when Herz leaves, and his views on the topic are unknown.

"From our perspective the outlook is better and better that it might not go through," the ABA's Donna Fisher said. "There is almost unanimous opposition to it, and not just from the banks."

Fair value supporters, on the other hand, say much of the criticism has been generated by an ABA letter-writing campaign intended to demonstrate popular opposition.

"The fair value proposal's opposition is running their campaign on the premise that sheer weight of numbers is what should drive FASB's decisions," Jack Ciesielski, publisher of The Analyst's Accounting Observer newsletter, wrote last month.

If critics can rally enough opposition, congressmen could paint FASB as a "renegade regulator" and call for it to be restrained, he said. Banks dread the measure because investors may see when bank managers are "endangering their capital through poor decisions," he said.

WHO WILL BLINK?

FASB is taking written comments until September 30 and will hold public roundtables in mid-October. It will then deliberate again, a process that could take "from several weeks to a couple of months," said FASB spokesman Neal McGarity.

Before releasing its draft proposal in May, FASB had debated the changes for months with the London-based International Accounting Standards Board.

The two have attempted to converge their accounting standards but remain divided on mark-to-market, with IASB still proposing that most loans be valued based on amortized costs.

Support for convergence was a common thread in many of the comment letters, observers said.

"I think this kind of overriding pressure to converge will cause one side or the other side of the ocean to blink," said David Larsen, a managing director at financial advisory firm Duff & Phelps.

(Reporting by Dena Aubin; additional reporting by Emily Chasan, editing by Leslie Gevirtz)