Don't Change Mark to Market

Accounting rule changes could dent confidence, say analysts
Hasty revisions to controversial accounting rules on how to value assets risk undermining investor confidence in company accounts, a group of senior investors and analysts has warned.

Members of the Corporate Reporting Users Forum, a pan-European group of investors and analysts, urge the European Commission not to make further amendments to accounting rules.

The Commission is hosting a meeting today involving regulators, banking and insurance representatives, investors and accountants to discuss further changes to the rules.

The resulting "wish list" will then be presented to the International Accounting Standards Board, which sets accounting rules for more than 100 countries, including those in the European Union. The so-called fair value accounting rules require companies to mark most financial instruments at their market value.

In the present illiquid markets, values have plunged, forcing banks and insurers into a series of enormous write-downs that have savaged their capital reserves.

The IASB has eased its rules to align them with US practice but many banks and insurers believe the standards misrepresent their true financial health and have called for immediate changes.

In a letter to the Financial Times, the CRUF pledges to oppose any steps by the Commission that could lead to a European "carve out" of the IASB's rules or potentially lead to the creation of a new regional standard setter. "Now especially, investors need comparability and transparency, not further uncertainty and inconsistency," the group said.

Although the final "wish list" is not yet known, today's discussions will cover calls for further easing of fair value rules in illiquid markets and for more instruments to be accounted for not at fair value but at "amortized cost" - a practice that would smooth their impact on institutions' balance sheets.

The list could, however, pose a threat to the IASB, which is likely to have previously dismissed many of the requests and could struggle to revisit them without damaging its credibility.

Other countries that have adopted, or are adopting, the IASB's rules include China, Hong Kong, South Africa, Australia and Canada. Many have warned the IASB about the dangers of being seen to be led by one interested bloc.

If the IASB finds it cannot accede to the requests, there have been some private suggestions that Europe would do better with its own accounting rulemaker - a move that would be a death blow to the long-running and almost successful effort to converge all accounting into a single global set of rules.
By Jennifer Hughes in London and Nikki Tait in Brussels for the Financial Times

Blaming the Bean-Counters
Accounting rules did not cause the financial crisis; changing them won't end it.

Inevitably, perhaps, the deepening financial crisis has spawned a search for scapegoats and quick fixes. According to many Republican members of Congress, banking industry lobbyists and financial pundits, the Wall Street meltdown would not be nearly as bad as it is but for the baleful impact of "mark-to-market" accounting rules. These are national standards, adopted in the wake of the savings and loan debacle of the 1980s, that require banks to carry certain financial assets on their books at the current market price. The idea is to give investors the latest and most objective estimate of a company's true financial condition -- as opposed to a company's inevitably self-serving calculation based on original costs.

Now that the markets for mortgage-backed securities and derivatives have seized up, however, their market price is either distressingly close to zero or impossible to determine. Critics argue that marking-to-market when there is no market artificially and irrationally depresses banks' balance sheets, since the assets would fetch near face-value under normal circumstances. Ergo, they contend, the way to shore up bank capital is to relax or eliminate mark-to-market -- and it wouldn't cost taxpayers a dime.

The critics have a point. Undoubtedly the markets, out of irrational fear, are shunning some relatively solid assets as well as actual turkeys. Mark-to-market therefore does force banks to write their books in the panicky language of today's meltdown. Perhaps, once the crisis is over, it would be wise for the Securities and Exchange Commission and the accounting authorities to revisit this "pro-cyclical" aspect of the rule. The recent bailout legislation included a provision requiring the SEC to study mark-to-market's impact. We see no harm in that.

But the critics' arguments against mark-to-market may prove too much. If the rule requires banks to accentuate the negative during bust times, then presumably it is also to blame for all those wonderful financial statements the banks were issuing during the boom. We don't recall anyone demanding its suspension then. Actually, complaints about the rule probably overstate its impact, since financial institutions only have to use it for securities they intend to trade. Loans and securities held to maturity are not covered by mark-to-market; at big banks such as SunTrust, Wells Fargo and Bank of America, such long-term assets represent half or more of all assets.

Markets not only need transparent financial reporting, they need consistent financial reporting. To suspend or abandon mark-to-market now, in the middle of a panic, would simply deepen the confusion and suspicion that are already crippling the financial system. No, today's financial meltdown is not some accidental byproduct of misguided technical rules. It happened because too many firms made too many bad financial bets with borrowed money. Pretending otherwise won't solve anything.
Washington Post Editorial