SEC, FASB: No Market? Use Future Cash Flows; Big Four Chimes In

SEC, FASB Resist Calls to Suspend Fair-Value Rules

The SEC and FASB issued ``clarifications'' today on how banks should interpret existing rules that require them to review their assets each quarter and report losses if values have declined. A suspension isn't being considered.

Congressmen, banking lobbyists and companies including American International Group Inc. have urged the SEC to place a moratorium on fair-value accounting, saying it forces firms to report losses that they never expect to incur. Federal Reserve Chairman Ben S. Bernanke and other proponents say a suspension would erode confidence that firms are owning up to losses.

``In the past couple of weeks, fair-value accounting has been under attack,'' JPMorgan Chase & Co. analyst Dane Mott wrote in a report today. ``Blaming fair-value accounting for the credit crisis is a lot like going to a doctor for a diagnosis and then blaming him for telling you that you are sick.''

``Suspending the mark-to-market prices is the most irresponsible thing to do,'' said Diane Garnick, who helps oversee more than $500 billion as an investment strategist at Invesco Ltd. in New York. ``Accounting does not make corporate earnings or balance sheets more volatile. Accounting just increases the transparency of volatility in earnings that already exists.''

SEC Clarification May Help Markets

The Securities and Exchange Commission and the Financial Accounting Standards Board have just made an announcement that, dry as it sounds, may mean a great deal: "When an active market for a security does not exist, the use of management estimates that incorporate current market participant expectations of future cash flows, and include appropriate risk premiums, is acceptable."

The SEC is not telling holders of hard-hit mortgage-backed securities that they can willy-nilly slap any value on them they want.

Today's SEC rules clarifications do not end mark-to-market accounting. But they do let the holders of these low-value "toxic assets" to use other ways to value them, which probably will lead to an increase in their value, even though that is not the SEC's intention.

Auditors Resist Effort To Change Mark-to-Market

U.S. accounting firms, which had been silent on the $700 billion financial-rescue package rejected by the U.S. House of Representatives on Monday, are opposing congressional efforts to scrap mark-to-market accounting rules.

"It's just bad for investors," said Beth Brooke, global vice chair at Ernst & Young LLP, in Washington, D.C. "Suspending mark-to-market accounting, in essence, suspends reality."

"It's absolute idiocy," said Barbara Roper, director of investor protection for the Consumer Federation of America. "Allowing companies to lie to investors and lie to themselves is not the solution to the problem, it is the problem." “the alternative to mark-to-market accounting is mark-to-myth" and could give banks and other financial companies the freedom to value assets at inflated amounts.