Posted on 04/02/2009 9:40:30 AM PDT by TeleStraightShooter
The board that sets U.S. accounting standards on Thursday gave companies more leeway when valuing assets, providing a potential boost to battered banks' balance sheets.
The independent Financial Accounting Standards Board voted to adopt new guidelines under the so-called mark-to-market accounting rules, which require companies to value assets at prices reflecting current market conditions. The board was meeting at its headquarters in Norwalk, Conn.
The changes will allow the assets to be valued at what they would go for in an "orderly" sale, as opposed to a forced or distressed sale. The new guidelines will apply to the second quarter that began this month.
The mark-to-market rules have forced banks to take steep write-downs on some assets, especially securities tied to high-risk subprime mortgages, as the industry has reeled from the housing market slump and banks have foundered and failed.
The banking industry and lawmakers of both parties have been pushing for the rules to be relaxed. An estimated $2 trillion in soured assets is gumming up banks' books.
In an ironic twist, the new leeway for banks could undercut the government's new financial rescue program in which it is joining with private investors to buy up about $500 billion in toxic assets from banks, some experts say.
The fear is that companies will use the leeway to boost the value of the assets on their books to "unrealistic levels," Robert Willens, an expert on tax and accounting issues for Wall Street clients, told The Associated Press last week.
"The FASB's relaxation of these rules might come at the most inopportune time," he said.
In the short run, banks would benefit by raising the value of the assets. But higher values could drive away prospective private investors—who don't like to overpay, even though the government will absorb most of the risk.
If the assets remain on banks' books, they may continue to be reluctant to lend as they fret over the assets' future performance.
That could work against the purpose of the government's program: to break the logjam in lending and get the economy pumping again.
"Banks need to have flexibility" in valuing assets but the fair market rule shouldn't be scrapped, Sheila Bair, the chairman of the Federal Deposit Insurance Corp., told a gathering of bank executives Wednesday. "There needs to be integrity in those bank balance sheets."
Proponents of the mark-to-market rule argue that suspending or scrapping it—as banking executives urged last fall—would weaken transparency in companies' financial statements, hurting investors and the capital markets.
But critics say the rule mandates onerous write-downs and saps investor confidence in banks, not reflecting the true value of soured, mortgage-linked assets and the higher prices they may fetch in the future as the market recovers.
At a hearing last month, a House panel wrung a pledge from FASB Chairman Robert Herz to try to issue guidelines in three weeks that would relax the mark-to-market rule.
The head of the House Financial Services subcommittee, Rep. Paul Kanjorski, D-Pa., had held out the threat of legislation to pressure the standard-setting board to take the steps.
I'm with Steve Forbes on this issue, its about damn time they at least try to fix that Charlie Foxtrot they created!
I agree...’bout time.
Awesome. Banks get to cook their books even more. Great news.
Screw the ‘market’ value.
Oh, well... back to the Photoshopped economy.
Sigh.
Goodness, had mark to market not been instituted, we would not be in this confusing mess. But, then again, Barney, Chris and their buds would still be looting that piggy bank.
Sadly, they have just moved to the trough of the Treasury.
At most the banks should be allowed to make estimates based on current cash flow which they can report in addition to the official mark-to-market valuation. Then investors could decide which they believe.
Blaming mark-to-market for the banks' problems during the real estate collapse is like blaming the x-ray for your arthritis.
Next thing they should do (but wont) is cancel that stock option crapola.
Options in scores of companies are now worthless yet the companies P&L and balance sheets were diminished by the “real” value of paper.
Thank you Warren Buffett.
Before Mark to Market FAS 157:
A 30 year mortgage could be valued at what it could be sold for at when it's value is at it's highest over the next 30 years. By low sell high. It's real estate, it's not going anwhere.
After Mark to Market FAS 157:
A 30 year mortgage was valued at what it could be for TODAY if it had to be in a flooded market under a margin call. Buy high, forced to sell low.
The head of the House Financial Services subcommittee, Rep. Paul Kanjorski, D-Pa., had held out the threat of legislation to pressure the standard-setting board to take the steps.
Did Barney & the (D)s 110th Congress brow beat the FASB into FAS 157 in the first place?
Screw the ‘market’ value.
Actually, this is a step in the right direction.
Before Sarbanes-Oxley -- an ill-considered over-reaction to the Enron scandal -- companies which were unexpectedly caught with a clutch of over-valued assets, but were otherwise profitable, were allowed to write-down the loss over time.
Often, the assets would recover some value -- as is the case with much of the current "toxic assets" --thereby reducing the loss. Otherwise, the companies were able to continue operating -- charging the loss against annual profits on a pre-approved audit schedule.
With Sarbanes-Oxley, however, the rules require that such assets by "marked to market" immediately. Which, in this case, was zero. As a consequence, many financial firms saw their net worth evaporate and found themselves not in compliance with their loan covenants -- leading to immediate and uncontrolled bankruptcy.
In the absence of Sarbanes-Oxley, many of these firms would still be in business and the "credit default swap panic of 2008" would not have been nearly so deep nor so long.
So, the government is not only responsible for initiating the financial mess (Fannie Mae and Freddie Mac), it was responsible for intensifying it (via Sarbanes-Oxley).
The bankers might share some of the blame. But, at worst, they were accessories after the fact and, at best, innocent bystanders.
I'll go get a loan or value my house at the value in thirty years, instead of the ‘value’ of it today.
Awesome way to do business.
Given today's real estate market, the value of your home is probably less today.
But, if you were forced to value it at zero, even though you are current, solely because you can't sell it tomorrow, how would your balance sheet look? Could you get another loan? Could you continue doing business as usual?
I regret you fail to understand the proposition -- the audit/accounting rules worked quite well for over one hundred years...until Sarbanes-Oxley.
Evaluating securities has always required judgement. That has always been the rule and will always be so.
It may help to bring and end to the firesale valuations that are now the rule.
I wish more people would research securities rather than just jump on them because someone says to. I had a friend who lost 8 million because he followed the advice of his sons who said “Buy Enron, Coastal and WorldCom”. He lost the 8 mil in one day or so. He didn’t do his homework.
Amen to that!
Thank you for your reasoned words. Sarbanes-Oxley has been a festering boil on the arse of the financial markets as long as it has existed.
Just how long must we pay for the Enron blow out?
How many trillions do we dump down the hole in penance?
Color me disgusted....
Market value reveals the price of it.
I'm not an accountant, nor have I ever worked in the financial business.
As such, I always wondered why companies were allowed to write down losses on devaluation of assets over a period of years.
Having seen the consequences of Sarbanes-Oxley, now I understand why...
Just like during the government created S & L crisis. What we have is legal looting. That is not how a market economy should behave.
The trouble is that we have too much govt. meddling. If the market set interest rates the massive run ups wouldn’t have happened. If the government backed political hot houses - Fannie and Freddie - had not dominated/created a massive secondary market most of the fraud would not have happened.
Tragedy of the Commons plays out all the time.
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