As the financial crisis grinds on, Congress is taking another look at accounting rules that force banks to value assets at current prices even if they plan to hold them for years.
The campaign to suspend the rules waged by bankers, House Republicans and industry-friendly Democrats, which hit a roadblock late last year, has returned in a new legislative proposal that targets the Securities and Exchange Commission. As banks large and small have foundered and failed, the industry has been devastated by the write-downs it has been forced to take on mortgage-backed assets since the collapse of the housing market.
The House Financial Services subcommittee on capital markets is holding a hearing Thursday, scheduled to begin at 10 a.m. EDT, to explore problems facing so-called mark-to-market accounting amid the ravages of the global financial crisis.
"While companies need stability, investors still need accurate information," Rep. Paul Kanjorski, D-Pa., the panel’s chairman, said in a statement. "We therefore cannot allow for fantasy accounting that wishes away bad assets by merely concealing them."
"I want to find a way … to still provide investors with the information needed to make effective decisions without continuing to impose undue burdens on financial institutions," Kanjorski said.
Proponents of mark-to-market rules argue that suspending or scrapping them would weaken transparency in companies’ financial statements, hurting investors and the capital markets. Critics say the rules mandate onerous write-downs – sapping investor confidence in banks – that don’t reflect the true value of soured, mortgage-linked assets and the prices they may fetch in the future.
SEC Chairman Mary Schapiro told another congressional panel Wednesday that "it is not our intention that these assets be written down to zero … or to fire-sale prices."
Still, the SEC doesn’t advocate suspending the rule. Schapiro said it is "pushing" the Financial Accounting Standards Board to come up with new guidance for companies that will provide "a better application" for determining what assets are worth. The standard-setting board is expected to put out the new guidance in the second quarter.
Federal Reserve Chairman Ben Bernanke took a similar position regarding mark-to-market accounting in comments on Tuesday.
The SEC’s acting chief accountant, James Kroeker, is appearing before the subcommittee at Thursday’s hearing. He directed the SEC’s study on the accounting rule, mandated by Congress as part of the $700 billion financial bailout package and issued in December. With the study, the SEC officially recommended retaining the rule while suggesting improvements to current practices for valuing assets.
Also due to testify are FASB Chairman Robert Herz and Kevin Bailey, deputy comptroller for regulatory policy in the Treasury Department’s Office of the Comptroller of the Currency, which regulates national banks.
Banking regulators generally look less favorably on mark-to-market rules than those overseeing the securities markets, such as the SEC. Federal banking regulators would get partial control of a crucial area now overseen only by the SEC under the legislation proposed by Reps. Ed Perlmutter, D-Colo., and Frank Lucas, R-Okla. It would create a new federal board to oversee how accounting principles are applied to the financial markets, and the board’s members would include the heads of the Federal Reserve, the Treasury Department, the Federal Deposit Insurance Corp. and the SEC.
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