The debate over mark to market
(or model) accounting and its role in the financial crisis made its way to
Congress today. The concern is that
banks will not incur the losses booked per mark to market accounting as asset
values recover over time from today’s clearance sale prices.
Last month the FASB initiated a
project to improve guidance on determining fair value and on disclosure of fair
value estimates. The project was
scheduled for the second quarter and includes determining when a market is
active or inactive and applying fair value to hedge fund and private equity
investments. The project will now move
forward sooner after House
Panel gets FASB pledge on accounting rule.
A House panel wrung a pledge
Thursday from the head of an accounting board to try to issue guidelines in
three weeks that will ease rules that force banks to value assets at current
prices.
The commitment by the chairman of
the independent Financial Accounting Standards Board came amid a muscular
display of congressional power at a hearing on the so-called mark-to-market
accounting rules. The head of the House panel, Rep. Paul Kanjorski, D-Pa., had held
out the threat of legislation to pressure the standard-setting board and the
Securities and Exchange Commission to take steps that would give relief to
battered banks.
Congressman Kanjorski’s threat of
legislation should remain just a threat, as the free markets of the United
States do not need politicians determining accounting standards.
"We may help save the jobs of several million
Americans and help keep the country out of a worse economic situation"
than the current one, Kanjorski said.
Moving accounting numbers around
will not lead to consumer spending, job creation and growth. It will serve to give financial companies a
breather and time to recapitalize.
I agree that to mark the value of
all the houses on a street to the price of the one foreclosed home is
inappropriate. On the way up these same
companies (and their stocks) benefited from increasing asset values but now
that the financial industry is at the edge of the cliff, these same rules look
to strict.
The FASB Chairman
did not put suspending mark to market accounting on the table. In fact, Chairman Herz had this to say in
his testimony:
We agree with the SEC’s conclusion that fair value did not cause banks
to fail. Rather, its use can help to more promptly reveal underlying problems
at financial institutions. We also agree with the SEC that suspending or
eliminating the existing fair value requirements would not be advisable, would
diminish the quality and transparency of reporting, and could adversely affect
investors’ confidence in the markets.
Of course, good accounting and reporting can have
economic consequences, including potentially leading to what some term as procyclical
behavior. Highlighting and exposing the deteriorating financial condition
of a financial institution can result in investors deciding to sell their stock
in the entity and lenders refusing to lend to it, to the company trying to shed
problem assets, and to regulators and the capital markets recognizing that the
institution may be in danger of failing and need additional capital.
I believe these
(procyclical behavior) concerns are more effectively and appropriately
addressed through regulatory mechanisms and via fiscal and monetary policy,
than by trying to suppress or alter the financial information reported to
investors and the capital markets.
The last thing the market needs is less transparency
and more difficulty understanding financial institution’s balance sheets. The
FASB, under tremendous pressure from Congress and Wall Street, will likely
relax the rules by providing better guidance allowing companies to rely on
their models more but require additional detailed disclosure. I hope Chairman Herz and the other FASB
members find a good medium for fair value accounting that gives banks time to
recapitalize and investor more detail about an institution’s holdings.
