Former FDIC Chairman Isaac Opposes FASB Loan Accounting Proposal
By Matthias Rieker, Of DOW JONES NEWSWIRES
NEW YORK -(Dow Jones)- Former Federal Deposit Insurance Corp. Chairman William Isaac is teeing off on a proposed change in accounting for bank loans that he says would "destroy banking as we know it."
The Financial Accounting Standards Board proposed Wednesday to force banks to account for their loans at current market value, rather than by historical cost as currently is done. Isaac wrote in an email statement Friday that, if such a move "does not spur Congress into action on providing some systemic oversight on FASB, I don't know what it takes."
Isaac has been an outspoken critic of accounting rules and the government's response to the financial crisis. In particular, he has strongly opposed existing mark-to-market rules, which supporters say give an accurate picture of banks' financial condition, and which contributed to losses banks reported during the financial crisis.
Isaac also opposed the Treasury Department's Troubled Asset Relief Program, which was originally designed to take bad mortgages off banks' books, but turned into the Capital Purchase Program, in which the government injected capital into banks.
Mark-to-market accounting rules force banks every quarter to adjust the value of securities to rising or falling markets. The rule was one of the early targets of criticism in the financial crisis, with some bankers and analysts arguing that the falling values of securities couldn't be determined because markets for the securities had dried up. Worse, it prevented strong banks from buying weak ones because the acquirer would suffer a financial setback in adjusting the value of loans it acquired.
Expanding those rules to loans that banks hold on their books, as the new proposal would do, "will destroy banking as we know it and will make it virtually impossible for small businesses and real estate developers to obtain longer term financing," Isaac said in the statement Friday.
FASB Chairman Robert Herz said in a press release Wednesday that the "changes we are proposing are aimed at improving the accounting for financial instruments" with "the goal of greater transparency in financial statements."
But the proposal wasn't well received by some on Wall Street. "I view this as madness," Christopher Whalen, the managing director of Institutional Risk Analytics, a consulting firm, said Friday.
"We are ignoring centuries of history that say that depositories are not supposed to be affected by short-term market and economic cycles. It is fine and even good policy to require mark-to-market for broker dealers and trading books of banks," but not the loan book, he said.
Stifel Nicolaus & Co. Inc. said in a research report Friday the proposal falls "short of the stated goal of greater transparency. In fact, we think it could cause much greater volatility due to the varying degrees of subjectivity that could arise."
The report asked, "Haven't we learned in the past year or so that despite popular belief, the markets can be very inefficient at times?"
Barclays Capital analyst Jason Goldberg wrote in a report Thursday: "One of our hopes coming out of the past couple of years was to reduce the pro- cyclicality of bank earnings. These proposals appear to take a step in the opposite direction."
FASB is not surprised by the storm of criticism. "This is a proposal and we are seeking input. This is not a done deal," a spokeswoman said Friday. The comment period is until Sept. 30.
Mark-to-market gains and losses are recorded in "other comprehensive income," a category that bypasses the income statement compiled by generally accepted accounting principles. But FASB proposed to combine other comprehensive income with the income statement to show shareholders the original and adjusted value of the loans, hoping to bridge the gap between FASB and its critics.
Whalen said, "I think mark-to-market will be viewed as a disaster in years hence."
To some, including Isaac, it already is. He has said that the rule exacerbated the financial services meltdown. In February 2009, Isaac said on "PBS NewsHour": "If we...had had mark-to-market accounting--and that's where the SEC requires these banks to mark down marketable assets to whatever the current market price is--in the 1980s, every one of the major banks would have failed, absolutely." Isaac was FDIC chairman during the savings-and-loan crisis of the late 1980s and early 1990s, when thousands of banks failed.
"Mark-to-market accounting has destroyed $600 billion of capital in the banking industry, which is $6 trillion of lending capacity," he said on " NewsHour."
The FASB spokeswoman argued the opposite: The lack of clarity and timely value of assets held for collection contributed to the current crisis. "We have never seen any evidence to support" the notion that mark-to-market worsened the crisis, she said, and added FASB encourages critics to submit their evidence with their comments to Wednesday's proposal.
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