Accounting: Backing Off On Mark-To-Market
Maurna Desmond, 03.16.09, 06:00 PM EDT
Controversial accounting rules might be tweaked just in time for earnings and bank stress tests.
forbes.com
Several large Wall Street firms say they're on track for a profitable first quarter. Now they may get another boost, thanks to the Financial Accounting Standards Board.
Under a new proposal, so-called mark-to-market accounting rules would be tweaked, allowing financial companies more leeway in pricing assets rendered near worthless by the lack of buyers in the market. FASB's proposal is now open for comment and will be voted on during the April 2 board meeting, just in time for banks' first-quarter earnings season. FAS 157, the current mark-to-market rule, has been blamed by critics for the enormous destruction of bank capital--and the need for massive government bank rescue programs--over the last year.
If the changes go into effect, banks' tier-one capital ratios could fatten fast, allowing them to lend more without raising more money in a hostile market. It could also help some firms get a passing grade on government 'stress tests' to assess their fiscal health. Most important, improved capital ratios could draw private investors back to banks and allow some of those that got money from the government to repay it more quickly.
After FAS 157 went into effect in January 2008, firms were forced to value their assets based on the most recent trade. This is fine in a busy market, but when there's little or no trading, the deeply discounted "sale" price becomes the value for any similar assets, even if the security is performing well.
While a cash-rich firm might be able to hold their undervalued assets until they recover, forced sales at wobbly outfits drive values down further, triggering more losses. "It had the unanticipated effect of throwing gasoline on the fire," said Sanford C. Bernstein analyst and former Lehman Bros. Chief Financial Officer Brad Hintz. "When this thing was written no one anticipated that markets could become this illiquid."
Letting banks revalue illiquid assets might also take some of the pressure off the 'bad bank' idea that Treasury Secretary Timothy Geithner has championed. Since banks might now be more capable of holding on to some of these toxic assets on their own, they won't need the government to take it off their hands.
The accounting board has been pressured in the last few months to reverse FAS 157 altogether, but these proposed changes fall short of that. Testifying before Congress last week, FASB chairman Robert Herz noted the virtues of such "fair value" accounting, which allow investors to evaluate the worth of a company and its assets without relying solely on the company's estimates.
Still, "The Board acknowledges there are significant challenges to estimating fair value, particularly in illiquid markets, requiring the gathering and analysis of relevant data and the exercise of sound judgment." |
