Lots of press on mark to market accounting. For accountants, a potentially disturbing piece of the financial rescue plan includes powers for the SEC to suspend FAS 157 if it pleases. More ominous is a study on how accounting standards are developed and whether the standards need to be changed. This shows the impact of the combined eforts of Wall Street Lobbyists and the American Banking Association on the negotiations in Washington over the past week. See various articles and blog postings below.
Bailout Bill Gives SEC Sweeping Power to Halt Fair Value
The critics of fair-value accounting have apparently gotten a hearing on Capitol Hill: The current bailout bill being debated today in Congress includes sections giving the Securities and Exchange Commission power to:
- suspend mark-to-market accounting "for any issuer" and to launch a probe into the question of whether it contributed to the crisis. Under the securities laws, the SEC would have the authority to "suspend, by rule, regulation, or order, the application of Statement Number 157 of the Financial Accounting Standards Board for any issuer...if the Commission determines that is necessary or appropriate in the public interest and is consistent with the protection of investors," according to Section 132 of the bill.
- launch a study of the effects of 157 on financial institutions, including depository institutions. The study would mull the effects of the standard on bank balance sheets; the impact of fair-value accounting on this year's bank failures; and how mark-to-market affects the quality of financial information provided to investors.
- probe how FASB develops accounting standards; whether it's advisable and possible to change the standards; and "alternative accounting standards to those provided in such Statement Number 157."
Fed & Treasury Needs to Stop Targeting Asset Prices
What the Fed, Treasury and SEC seems to fail to understand is that you CANNOT get a return to normalcy after a bubble -- not until prices are allowed to fall to levels that bring in aggressive buyers. That is true for stocks, houses, and even financial institutions. The plan as it is currently constructed fails to recognize that Housing prices still remain elevated, more foreclosures are likely, and that another 10-20% downside in real estate is quite likely. Instead of focusing on asset prices, we should be looking at recapitalizing the banking institutions, providing liquidity to those that need it, and managing insolvency via FDIC. Its time to fix what's broken, and leave the assets pricing to the markets.
Section 132 of the rescue plan Troubled Asset Relief Program (“TARP”) is headlined: Authority to Suspend Mark to Market Accounting. It should have been called: Authority to Suspend Reality. During the boom, it seems market prices were perfectly acceptable, a function of supply and demand. Now, during the crash they are considered "fire-sale". But how will bean counters arrive at a more appropriate price for assets? Perhaps they can now be determined by a committee.
The ‘Compromises’ in the Bailout Bill
Meanwhile, the most interesting new provision is one allowing the Securities and Exchange Commission to suspend mark-to-market accounting. As you may have heard, the mark-to-market requirements have been cited as one of the causes of the current financial-institution liquidity crisis.
After the Deal, the Focus Will Shift to Regulation
In any case, it is too late to abandon mark-to-market accounting. Just how reassuring to investors would it be for the government to issue a rule saying it is O.K. for banks to value assets for far more than anyone would pay for them?
The House Republicans’ Alternative Rescue Plan
Repeals of various kinds of regulation are on the table. Some Republicans want to roll back parts of Sarbanes-Oxley. A number have advocated changing mark-to-market provisions — the rules that say companies have to value assets according to what they’re currently worth on the market (which, for some assets right now, is not very much, or at the very least hard to calculate), rather than according to what they initially cost or through some other fundamental analysis.
Should Mark-to-Market Provisions Be Suspended?
It’s crazy to let strict adherence to an accounting rule cause so much damage.
I think the right answer may be that firms with fundamental value not reflected in current mark to market prices should find a way to explain that to their investors. These explanations would not be GAAP-consistent [that is, hewing to generally accepted accounting principles], but as long as they are described as such, there is no prohibition against such explanations. I am actually surprised that this is not used more often. Unless, of course, there is no fundamental value….