Securities and Exchange Commission and Mark to Market Changes

Includes: AIG, BXS, GE
by: Andy So

The SEC is in talks again about possible adjustments to the Mark to Market accounting standards that are held up by FASB (Financial Accounting Standards Board) Rule 157. Any suspension of FASB 157 would have dramatic implications on our economic recovery. Book value for many publicly traded companies would once again shoot through the roof. This would create a false sense of security and credit quality. What companies like Blackstone (BX), AIG (AIG) and even General Electric (GE) are looking for is a source of affordable credit so they can slowly spread out the eventual further writedowns they will likely need to take.

Although a tremendous amount of new liquidity has been injected into banking markets, lenders are increasingly fearful of servicing new loans and have set very tight internal qualification standards. Relaxing or suspending FASB 157 would allow firms to gain easier access to bank funds. Executives, commercial loan officers and credit origination teams would be able to go back to the Board of Directors of their banks and say “the borrower legally met our internal qualifications”. People want to do business, but in this fragile credit market, many need a scapegoat before being willing to take the risk of a borrower defaulting.

Taken from this Marketwatch article, Mark-to-market manipulation:

A movement spurred by bankers including Aubrey Patterson, chief executive of Bancorpsouth Inc. (NYSE:BXS) , and Wall Street power brokers including Blackstone Group (NYSE:BX) Chief Stephen Schwarzman are arguing for at least a temporary suspension of Financial Accounting Standards Rule 157.

Patterson and other supporters argued for the rule’s suspension in a Securities and Exchange Commission roundtable Oct. 29. Other critics of FAS 157 included Damon Silvers, AFL-CIO general counsel, and Bradley Hunkler, an insurance executive from Western & Southern Life.

Simply put, these guys want the government to stop requiring mark-to-market accounting so the financial industry can put blinders on to the deep trouble that lies on its balance sheets. Not surprisingly, the proponents of a suspension would also apparently benefit from it.

For guys like Patterson, it would mean his bank wouldn’t have to take big charges each quarter to build reserves. Bancorpsouth increased its reserves by 50% to $16.3 million to gird against loan losses at the end of the third quarter.

For Schwarzman, suspension of the accounting rules might allow banks to start lending willy-nilly again — and that would mean a return of the cheap financing that fueled the private-equity buyout boom between 2005 and 2007. Private equity now must re-fund many of those deals with new loans or debt extended at much higher interest rates.

To learn more about FASB Rule 157 visit: FASB, Summary of Statement 157

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