Daily Briefing Weekend Edition

Plan May Boost 3Q Nets

By Brian Collins

WASHINGTON-Industry groups and their allies in Congress focused their frustration with the financial crisis on mark-to-market accounting rules and last week 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.

The FAS 157 clarification seemed to defuse the issue and the need to suspend FAS 157. "The SEC beat Congress to the punch," said Scott Talbott, chief lobbyist for the Financial Services Roundtable.

Meanwhile, Senate leaders dressed up a House version of the rescue bill by adding several legislative sweeteners, including an extension of corporate tax breaks - and an increase in the federal deposit insurance cap to $250,000 from $100,000 per account. The Senate passed a $700 billion rescue bill by a 74-25 vote last Wednesday. The House was scheduled to vote on the Senate-passed bill after this newspaper went to press last week.

But the core of the bill remains the same, authorizing Treasury to purchase $700 billion in illiquid subprime mortgage-backed securities and collateralized debt obligations from financial institutions and pension funds.

The Treasury secretary must spend the first $350 billion in stages and Congress can object to future draws. The government can take an equity stake in participating companies that sell mortgage assets to Treasury's troubled asset relief program and limit executive compensation, such as golden parachutes.

TARP servicers are expected to "utilize a systematic approach" to loan modifications and they can reduce the principal and interest rate on loans to prevent foreclosures.

A special tax provision permits community banks to deduct losses on investments in Fannie Mae and Freddie Mac stock. Another extends a current tax provision that allows homeowners to escape tax penalties due to debt forgiveness in a mortgage restructuring or foreclosure.

The bill also reaffirms the SEC's authority to suspend FAS 157, but it does not order the SEC to suspend FAS 157. However, the SEC must conduct a study on mark-to-market accounting and report back to Congress in 90 days.