INSTANT VIEW: U.S. eases mark-to-market accounting

Thu Apr 2, 2009 11:54am EDT

WASHINGTON (Reuters) - The U.S. Financial Accounting Standards Board on Thursday agreed to give banks more flexibility in applying mark-to-market accounting to their toxic assets.

The action by FASB, an independent accounting standards-setter, came after Congressional pressure to help banks that have been forced to record billions of dollars in lower values for distressed assets because of frozen markets.

Investor groups opposed the change, saying it would let big banks conceal the real value of their toxic assets.

KEY POINTS:

* FASB allows banks to apply new mark-to-market guidance in the first quarter of 2009.

* FASB says the objective of mark-to-market accounting is to set a price that would be received by a bank in an "orderly" transaction in the current, inactive market. It says an "orderly" transaction for accounting purposes does not include the forced liquidation or a distressed sale of an asset.

* FASB agrees to drop the presumption in mark-to-market accounting that all transactions in an inactive market are distressed unless proven otherwise.

* FASB clarifies when banks are required to take write downs on impaired assets, letting them record smaller losses on their income statements.

COMMENTS:

ANDY ENGEL, CO-MANAGER OF CORE INVESTMENT FUND, LEUTHOLD GROUP IN MINNEAPOLIS

"I think it's something that on a near term basis is obviously positive for the stock market -- being able to allow these financials to put what maybe a more realistic price on their assets is a good thing

"Long term there maybe some problems with that. It's a good thing to be able to value some of these things at a realistic price. Right now you're looking ahead and saying their depressed. If you continue to allow people to project what they think these might be worth in the future I think it could lead to some problems.

"Near term its a good adjustment I think I'd like to see them at the end of this crisis going back to instituting that again. You'd get to the point where you have people inflating asset values beyond what they are actual worth

RALPH COLE, PORTFOLIO MANAGER AT FERGUSON WELLMAN CAPITAL MANAGEMENT, IN PORTLAND, ORE:

"Whoever voted against this is probably thinking we don't want to give too much leeway to management teams, that we want to be as conservative as possible in pricing these assets, and darn it we need to get on with this."

"It will lengthen this process that has already felt like forever. It allows people to play a lot more games and maybe not recognize what they need to recognize as quickly. So that's definitely a downside to it."

"Now you're going to leave pricing back in the hands of management teams that may not have done a great job over this cycle, and you're going to have to trust them that they really are marking these things to a model and a price that is reasonable. It takes us back to the same thing: We're probably going to give more leeway to the management teams that you trust ... than those you don't."

"It will be interesting how quickly it can be implemented in this quarter's earnings, and does it change the market's opinion of the stocks just because they write up some assets."

JOSEPH BATTIPAGLIA, MARKET STRATEGIST, STIFEL NICOLAUS, YARDLEY, PENNSYLVANIA

"The mark-to-market rules have been and always will be imperfect. The value of mark-to-market is that it brings some information to the marketplace about what various securities are worth.

"For banks, they already had the most lenient treatment because in effect, mark-to-market was only applied for those assets designated by the banks as being held for sale within a year. So

"I look at the loosening up of mark-to-market -- which was a political effort by Congress against the FASB -- the TALF and the Geithner plan, as all reinforcing the zombie bank concept for America, particularly as it relates to Citicorp and Bank of America, that they will continue to be allowed to exist from a book-keeping point of view, on support from the federal government, for years to come. Which doesn't engender great enthusiasm in my judgment and it certainly sends mixed pricing signals to the marketplace."

ROBERT WILLENS OF ROBERT WILLENS LLC, AN ANALYST WHO SPECIALZIES IN TAX AND ACCOUNTING ISSUES

"This may end up being a dark day in history before it's all said and done. It's a Pyrrhic victory.

"This certainly helps banks cosmetically. It will increase capital levels quite a bit. Yet I'm finding the investors I speak to are mostly disappointed because it doesn't change the reality of the banks.

"Most of these assets are still losing value at a rapid clip. The fact that banks will not have to reflect that loss from an accounting point of view doesn't change the reality."

"More importantly, investors are dismayed that FASB was persuaded to come out with this proposal, that they did it under protest and that FASB doesn't believe in the changes. That this proposal was the result of Congressional threats to its independence."

SCOTT TALBOTT, CHIEF OF GOVERNMENT AFFIARS FOR THE FINANCIAL SERVICES ROUNDTABLE:

"The guidance removes uncertainty of pricing assets in an inactive or illiquid market. The guidance will remove artificially downward pressure on asset value and actually help restore the economy."

EDWARD KETZ, ACCOUNTING PROFESSOR, PENNSYLVANIA STATE UNIVERSITY, STATE COLLEGE, PENNSYLVANIA

"It is a huge mistake by FASB. FASB had had a principled view toward fair value, and has compromised it to allow companies to massage and manipulate balance sheet values."

"The impact will be twofold. In the short-term, there could be higher stock prices, and investors may feel better about banks. Longer-term, it will probably be negative because of the realization that numbers are being manipulated."

"People so much want to get past the recession that they may make the foolish move of interpreting the decision as good news."

TOM SOWANICK, CHIEF INVESTMENT OFFICER AT CLEARBROOK FINANCIAL, WITH $22 BILLION UNDER MANAGEMENT, PRINCETON, NEW JERSEY:

"Today's action by FASB to ease the mark-to-market accounting rule could have a tremendous impact on financial stocks from this point forward. This change can be applied to first-quarter earnings and it is estimated that net income may be increased by as much as 20 percent or more."

STEPHEN MASSOCCA, MANAGING DIRECTOR AT WEDBUSH MORGAN IN SAN FRANCISCO

"It would benefit any bank that is having issues because their stated tangible common equity is creating some problem for them.

"Now, via the waving of the wand, they're going to be able by virtue of a journal entry increase their stated equity.

"I see good from the standpoint that they are able to claim they have greater equity. That helps them be more stable, changes the tone of the conversation.

"It's potentially bad if that now promotes procrastination with regard to cleaning up these 'toxic' assets. If it somehow slows down the process of dealing with that, of disposing of them and moving things forward on that front, then that's a bad thing."

LEE OLVER, FIXED INCOME STRATEGIST, SMH CAPITAL, HOUSTON

"Overall I would think it would help the market in the short run. In the long run, it will cause doubts about the accuracies of financial statements when you don't know what value of the assets in financial institutions. It's a short-term fix that will create long-term problems."

JOSHUA SHAPIRO, CHIEF U.S. ECONOMIST, MFR, INC., NEW YORK

"Our reaction is that this decision decreases transparency and allows financial institutions to use fictional valuations on many of their toxic assets. Whatever "write-ups" result from this are unlikely to be valued very highly by markets, and this decision further obscures the true position of banks and other financial institutions."

"Shenanigans such as this do nothing to resolve the many problems facing the financial system; indeed this decision is more likely to delay necessary reform and restructuring than it is to create a positive outcome."

STEVE GOLDMAN, MARKET STRATEGIST, WEEDEN & CO IN GREENWICH, CONNECTICUT

"This was anticipated, given the politics behind it. It is a sigh of relief since people had been expecting it for the past 2-3 weeks, though again there's some political influence behind it.

"If we look back from the last 30's and into the late 90's I believe there was no such thing as mark-to-market. When you're forcing prices in a market where there's structural imbalances in terms of credit flows, and investors know that, it can lead to a continuous downward cycle.

"If they allow this, it puts pressure on a lot of businesses, including banks. If this was in place in the 90s I think a lot of banks would've imploded. It's quite a restriction.