U.S. Federal Reserve Chairman Ben Bernanke has supported accounting rule makers in their efforts to determine how to apply mark-to-market rules in illiquid markets such as the recent financial crisis. The banking and investment community has blamed accounting rules that they feel are too strict for worsening the global financial crisis. At issue are valuations for assets previously traded as liquid assets that suddenly become illiquid when markets freeze up.
The mark to market rules (“MTM”) require companies to write down assets every quarter to reflect market value. Bernanke doesn’t fully agree completely with the banks, who have always rejected fair value.
In testifying before a U.S. Congressionsl Committee this week, Bernanke said:
MTM is “a good principle in general” and shouldn’t be suspended completely.
“Accounting authorities have a great deal of work to do to try to figure out how to deal with some of these assets, which are not traded in liquid markets,”
“I don’t see a suspension of the whole system as being constructive, because there is a great deal of information in valuing many of these assets.”
Bankers hold strong and long-standing views that mark-to-market accounting has harmed banks and the economy. They say that harm comes from rules that require banks to state investments at fair-value, and that that accounting doesn’t work in illiquid markets because there isn’t enough market data to determine the real value of assets. Treasury Secretary Geithner, the SEC, the FASB and the international Accounting Standards board (IASB) all have stated that the rules should stay because they enhance transparency of corporate reporting.
The SEC wants to keep fair-value accounting, despite calls from the banks to suspend the fair value rules until the financial crisis is over or until the rules can be sorted out. An SEC report released in December advocated that the fair value rules should be improved. They also countered bank claims, saying that “[fair value] did not appear to play a meaningful role” in bank failures last year. The FASB is currently engaged in a study to clarify how the mark to market rules apply when markets are inactive.