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.