Securities and Exchange Commission and Mark to Market Changes

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. (BXS) , and Wall Street power brokers including Blackstone Group (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

Comments

[captainccs:]

What's your point? Are you in favor or against?

2008 Nov 06 06:10 PM

[mattm:]

imo, you are putting a negative spin on this issue. many companies have assets that (because of market forces) are price way below what the assets are worth. in other words, in many instances, there is no market for some assets at the present time. how can you mark to market when there is not a functioning market?

2008 Nov 06 06:24 PM

[graupma:]

To allow the criminal element (executives of all wall street firms) any relaxing of regulations would be to throw the baby out with the bath water.

Now is the time to tighten restrictions, and re-introduce all regulations that were dropped during the last 8 years.

To allow any firm on wall street or any bank anywhere in the U.S. to take advantage of the government and the public is tantamount to criminal activity.

p.s. The new Obama administration should not hire any executive or appoint anyone involved in the mortgage meltdown as I am now hearing they might.
It is outrageous to think they would do this.
I didn't vote to continue the old crap from these criminals.
Out with the old, in with the new.

2008 Nov 06 06:50 PM

[Eagle109:]

The problem with the FASB Rule 157 coupled with Sarbanes Oxley means if you overstate an asset value then you go to prison. Now most CEO's enjoy the light of day so you could understand their reluctance to sign off on any valuation method that could be challenged. Therefore FASB 157 states that if no readily available market price can be found then you must value the asset based on readily available data and adjust for the risk. In a market where no counterparty exists and no sales are being made then most investment banks are carrying a near worthless asset on the books according to FASB 157 and in light of Sarbanes Oxley the CEO will err on the side of caution. The issue has been partially addressed by the FASB restatement of Rule 157 but it brings little in punitive relief for those signing especially in the daily Mark to Market requirements. Until an effective market maker in these troubled assets can be implemented, then the rules and regulations keep an artificially low value on the books.

2008 Nov 06 07:03 PM

[thannagan:]

Graupma, because of 157 and SOX, the baby has been (and continues to be) thrown out with the bath water. 157 is okay if there's a market. Sans a market, you must divide by zero, which doesn't work well at all. I thought TARP was supposed to help create a market for some of these frozen instruments, but apparently that got sidelined.

2008 Nov 06 11:58 PM

[wakeup call:]

A move away from mark to market accounting for investments that are long term holds will lessen the artificial liquidity squeeze effecting may compnies. The logic of marking a synthetic security down based on perception where the underlying loans are performing is ludicrous. Deal with the problem loans as they become an issue rather than dealing with a synthetic security which has been downgraded by rating agencies because of fear of litigation. A move away from mark to market accounting will turn the $700 billion bailout of the financial markets into a much more fixable probelm. Moving on this issue before the election would have left both parties with egg on their faces since after hyping the magnitude of the bailout to then reduce it to a manageable size with a simple accounting change could have been embarassing. The election is over lets let sanity prevail and fix it properly.

2008 Nov 07 08:19 AM

[BerkeleyBob:]

There has been a massive failure to accurately and transparently place a value on assets aided and abetted by the credit rating agencies and resulting in an export of securitized debt to foreign central banks and institutional fiduciaries. When the defaults triggered by deflation of the housing price bubble resulted, our reputation suffered. Mark to market is an attempt to force realistic appraisal of debt. I agree it is imperfect and may have some unanticipated consequences, but is still a step in the right direction. We require insurance carriers to carry adequate reserves for a sound policy reason. The principle is similar, and if the banks get real with disclosure, we (taxpayers) will all benefit. Hell, I might even invest in a bank again.

2008 Nov 07 01:30 PM

[pgstocks:]

Fasb 157 is a well intentioned disaster. The general public thinks it sounds like a good idea, however what could they get for their house or car in the time span of a day or a few hours. Would they accept mortgages being called or car loans called due or would they cry foul as 3 months for a house to sell or a few weeks for a car selling would bring many times the value found in a few hours. Without liquid markets there is no point in marking things down to absurd values and destroy our economy. True values for assets is what we all want. We need to suspend and rework FASB 157 to be workable, reasonable and realistic.

2008 Nov 20 10:15 PM