The Financial Crisis: Momentum Gathers to Ease Mark-to-Market Accounting Rule
Elizabeth Williamson and Kara Scannell – 2 October 2008 –
WASHINGTON — The banking industry and a band of lawmakers have used the scramble to salvage the financial-markets rescue plan to give new life to an industry push to avoid billions in further write-downs with the stroke of a regulatory pen.
A proposal contained in the revised financial-rescue bill the Senate considered Wednesday reaffirms the Securities and Exchange Commission’s existing authority to suspend “mark-to-market” accounting. The language was meant to send a message to the agency to re-evaluate the issue. The practice, adopted in the aftermath of the savings-and-loan collapse in the 1980s, pegs the value of assets to their current market price, rather than the price paid for them. Banks have complained the strict application of mark-to-market rules has forced them to write down billions of dollars worth of mortgage-related securities, intensifying the squeeze in the credit markets.
Critics of the proposed changes to the “mark to market” rules say gains created by easing the rules would be illusory and would delay resolving genuine doubts about the value of mortgage assets that has caused the recent crisis in confidence.
As of Wednesday, the industry appeared to be gaining support for easing the rules, in part because some lawmakers believe it could cut the cost of a potential financial-industry bailout.
Banks and a diverse coalition of lawmakers scored a victory on the issue Tuesday, when the SEC and Financial Accounting Standards Board issued “clarification” to the mark-to-market accounting rules. The clarification allows executives to use their own financial models and judgment if no market exists or if assets are being sold only at fire-sale prices. FASB said it is preparing additional guidance for later this week.
The SEC and FASB stopped short of bowing to pressure for a complete suspension of fair-value accounting. But that pressure could intensify when the rescue bill reaches a House vote. Financial-industry lobbyists’ work on the financial-markets bill has given them another opportunity to press their case through allies in Congress, many of whom are big recipients of campaign money from the industry. More than 60 lawmakers — all but five of whom voted against the bill Monday — wrote to the SEC Wednesday, urging the regulator to immediately suspend the mark-to-market rule.
The Sept. 30 timing of the SEC ruling is no accident. Bankers were clamoring for the SEC to issue guidance or suspend the rules by the quarter end, when banks would be forced to admit their losses.
Accounting firms and investors groups put up a united front Wednesday in opposition to the changes. “Suspending fair value accounting during these challenging economic times would deprive investors of critical financial information when it is needed most,” said the Council of Institutional Investors, Center for Audit Quality and CFA Institute in a joint statement. “It would not help solve our economic difficulties.”
Some members of Congress say easing the mark-to-market rules could help taxpayers avoid billions of dollars in potential costs by allowing banks to avoid booking losses on securities that might have value after the credit-market crisis has passed.
“Onerous mark-to-market rules for certain financial assets that have no market value have worsened the credit crisis, and changing them has been a priority for House Republicans,” House Republican leader Rep. John Boehner said in a statement.
Republican presidential candidate John McCain, in a statement, praised the SEC clarification, saying, “There is serious concern that these accounting rules are worsening the credit crunch, making it difficult for small businesses to stay afloat and squeezing family budgets.”
In March — the month the industry began to lobby for the change — Sen. McCain called for a meeting of accounting professionals to study whether the accounting method was “magnifying problems in the financial markets.”
The Treasury, Federal Reserve Bank, accounting firms and some bankers say that divorcing the value of assets from their true market price can lead to an artificially rosy picture of a company’s financial health. Inflated asset prices, they warn, helped to contribute to the S&L collapse in the U.S. — which inspired the mark-to-market rule — and a decadelong economic slump in Japan in the 1990s.
“We have all seen what can happen when institutions are allowed to mask huge losses in asset values,” PricewaterhouseCoopers LLC Chairman Dennis Nally wrote in a letter to Congress. Suspending the rules, he said, could “plant the seeds for the next crisis.”
That hasn’t swayed fiscal conservatives in the House, who cite the need to suspend mark-to-market rules in explaining their opposition to the rescue bill.
“One of the best reasons to fire [SEC Chairman] Chris Cox is the refusal to deal with the problem of mark to market,” Rep. Darrell Issa (R., Calif.) said on MSNBC this week. “You do that, and you put trillions of dollars back into the lending pool. . . . It’s a tool that’s available [to] the SEC, the Fed, the FDIC and the Treasury secretary, and they’re not using it.”
There is a continued push to change accounting rules as part of a broader regulatory overhaul after the election. “What it does show is next year as part of the regulatory structural reform . . . accounting rules are going to be part of that discussion,” said Edward Yingling, president of the ABA.
Judith Burns and Elizabeth Holmes contributed to this article.