Wall St. girds for battle on accounting rules

By Emily Chasan and Rachelle Younglai

NEW YORK/WASHINGTON (Reuters) - In the middle of a credit crisis that only seems to get worse, Wall Street is mustering its lobbying clout to delay tougher accounting rules that would force banks to add $5 trillion to their balance sheets.

For years, accounting standards allowed U.S. banks to keep certain loans, such as those linked to risky subprime mortgages, in off-balance sheet vehicles. But members of the Financial Accounting Standards Board (FASB), which sets U.S. accounting rules, have become convinced that approach hid the true risks banks faced from these vehicles, and that standards must be fundamentally altered.

Under FASB's current thinking, analysts estimate financial institutions could be forced to book $5 trillion, which would most likely include troubled loans.

That would skew capital ratios, force banks to stash away cash to offset their risks, and hit their liquidity at the worst possible time.

"These drastic measures are being rushed and could single-handedly erase the efforts of policymakers to provide stability and restore liquidity to our markets," said Brendan Reilly, senior vice president with the Commercial Mortgage Securities Association (CMSA).

"Any changes must be delayed until all options and consequences are carefully examined," he said.

However, under direction of the Securities and Exchange Commission, FASB must revamp the accounting standard, known as FAS 140, by 2009. It could release a proposal on the new rule in the next few months.

LOBBYING TO KEEP ASSETS OFF

Lobbyists for Wall Street are meeting with the Federal Reserve, Treasury Department, SEC and other policy makers to slow FASB down. They say the accounting change would drain much-needed liquidity from their balance sheets at a time when the financial services industry is already in trouble.

A coalition of groups representing a virtual Who's Who of the financial services industry have started discussing the issue. That coalition includes the CMSA, American Securitization Forum, Securities Industry and Financial Markets Association, National Association of Realtors, Real Estate Roundtable and the Mortgage Bankers Association.

"The capital implications associated with putting them back on their books are traumatic," said Samuel Golden, a former ombudsman for the Office of the Comptroller of the Currency, now running the financial industry advisory group at Alvarez & Marsal.

"You're dealing with an industry that, from a capital sufficiency perspective, is already under pressure," Golden said.

CMSA has already had meetings with key lawmakers on congressional panels that oversee the Federal Reserve, Treasury Department and the SEC.

One source on the influential House Financial Services Committee said the changes FASB is considering are "significant and should be analyzed for unintended consequences that could prolong the credit crisis."

At issue for the banks is debt ranging from car loans to mortgages that were pooled into off-balance sheet funds, repackaged into securities and then portioned off and sold to investors.

Putting the loans into the off-balance sheet vehicles gave banks the leverage and capital to do more business and helped fuel a boom in the housing market that later crumbled.

FASB has made a preliminary decision to get rid of the special funds or qualified special purpose entities (QSPEs). It is considering whether to force banks to tell investors about their exposure to mortgage-backed securities, structured investment vehicles and other off-balance sheet items, even if the risks banks face are mostly to their reputations.

"That (off the balance sheet) concept has outlived its usefulness," said FASB Chairman Robert Herz at a recent meeting.

That has rattled Wall Street and the real estate industry, which rely on the QSPEs to repackage the loans and sell them to investors, in a process known as securitization.

But the biggest issue is how such a move could harm financial liquidity -- something government regulators have been working for months to restore.

Federal regulations require commercial banks to hold a certain amount of capital on their balance sheets in order to ensure that banks can absorb losses, protect customers' deposits as well as promote stability in the financial system.

FASB's change would apply to current and new securitizations and would require banks to figure out which party has to recognize the previously off-balance sheet items.

"It's really messy," said Carol Stacey, former chief accountant in the SEC's corporation finance unit. Stacey is now vice president of the SEC Institute, a group that provides training on SEC rules.

"This will cause their assets, liabilities to go way back up," she said.

Citigroup Inc (C.N), the country's largest bank, said FASB's proposal may have a significant impact on the bank's consolidated financial statements, according to its latest quarterly filing.

(Reporting by Rachelle Younglai in Washington and Emily Chasan in New York; Editing by Tim Dobbyn)