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

By Al Yoon

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.