Banks to Get Mark-to-Market Break

Washington-Industry groups and their allies in Congress focused their frustration with the financial crisis on mark-to-market accounting rules and last month successfully pushed the accounting authorities to cut struggling banks a break.

The industry hopes that with the push, soon-to-be-released third-quarter earnings may not look so bad.

After many House Republicans originally balked at the first "version" of the $700 billion bailout bill, some lawmakers pushed for a cheaper solution, proposing language to suspend Financial Accounting Standard rule No. 157, which governs writedowns on hard-to-value assets.

Many banks and securities firms have blamed the new accounting rule - which went into effect earlier this year - for the precipitous drop in the value of mortgage securities that has crippled so many firms.

This rule has exacerbated the credit crisis by forcing "massive write-offs," according to Consumer Mortgage Coalition executive director Anne Canfield.

"It makes no sense to unnecessarily cripple institutions that could otherwise weather this storm of financial uncertainty by being forced to continue to mark down their assets to unrealistic fire sale prices," Ms. Canfield says in a Sept. 29 letter to Securities and Exchange Commission chairman Christopher Cox.

The American Bankers Association and other industry groups also urged the SEC and Financial Accounting Standards Board to take quick corrective action.

The SEC and FASB responded by issuing a FAS 157 clarification last week, allowing investors to use "expected" cash flows to value illiquid mortgage assets in preparing their third-quarter financial reports.

"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," according to a joint statement by SEC and FASB staff.

The Mortgage Bankers Association welcomed the SEC/FASB action. "As a consequence, the clarification should allow firms to write affected assets back up to their intrinsic values," said MBA chief operating officer John Courson.

Next in News ►