Updated from 1:36 p.m. EDTThe Financial Accounting Standards Board voted Thursday in favor of a proposal that will give institutions more flexibility in how they use fair value, or mark-to-market, accounting rules, which have been blamed for exacerbating the financial crisis because it forced banks to record hefty writedowns on damaged assets. Under the new guidelines, the FASB agreed that the objective of mark-to-market accounting still involves what would be received in an orderly transaction in a currently inactive market. However, the board said that an "orderly" transaction does not include a forced liquidation or distressed sale, which will allow assets to be valued differently.
Several organizations, including the American Bankers Association, urged the FASB to make changes to mark-to-market accounting, arguing that the rules for banking institutions often provide misleading information on financial statements. Paul Mendelsohn, chief investment strategist with Hinsdale Associates, called the FASB's decision a "game changer." Last month, Mendelsohn wrote an opinion piece on why mark-to-market rules needed to be curbed. "It's one of the pieces of the puzzle that got us into this catastrophe," he said. "There was a sequence of events that altered the whole regulatory structure. First, it was the repeal of Glass-Steagal, followed by the uptick rule and mark-to-market rule changes. Combined with the Securities and Exchange Commission approval to allow banks to lever up, we got us to this point in the crisis. "However, mark-to-market was probably the largest component," Mendelsohn added. "You can see that because the crisis began after the writedowns came along with the mark-to-market rules."
"Banks can't mark these to anywhere they want," Mendelsohn said. "They're regulated, and I'm sure their regulators are going to look at the methodology. It still falls under Sarbanes-Oxley. They need to come up with a reasonable model to price them." Market participants also question whether the mark-to-market rule changes will now provide little incentive for banks to sell troubled assets to investors. Under the Obama administration's rescue plan for banks, a public-private partnership involving private investors, the Federal Reserve and the Federal Deposit Insurance Corp. will inject money into banks by taking these securities off their balance sheets. The fear is that banks won't be willing to part with securities at bargain-basement prices and will instead hold the securities and mark them with a higher value, although Mendelsohn argues that the mark-to-market changes may ultimately help out taxpayers. "If you can solve the problem without putting up taxpayer money, that's clearly a positive from the way one side looks at it," he said. "But the other factor is that
Treasury Secretary Timothy Geithner was pumping capital and money into the system so banks would have more money to lend, and mark-to-market changes make that unlikely. But again, they're committing less taxpayer money and not putting it at risk."