Quasi-governmental good news for a change.
The so-called "mark to market" accounting rule helped to
deepen the financial crisis but the Financial Accounting
Standards Board decided today to ease the accounting fiat
--and voila-- the Dow Jones Industrial Average closed
216 points higher than the previous close. According to
a report in
the Friday edition of the Independent (UK)
Banks in the US are being given more discretion on how to value
the toxic mortgage assets that have poisoned their balance
sheets in a reversal of parts of the controversial
"mark-to-market" accounting rules that many blame for
exacerbating the credit crisis.
The Financial Accounting Standards Board (FASB) voted yesterday
to let banks ignore market prices for assets if they judge the
market is illiquid and that the most recent sales are being
done at firesale prices by distressed sellers. There will also
be changes to allow banks to book smaller losses on impaired
assets that are available for sale, which could take extra
pressure off many of the biggest banks in the US.
Traders put yesterday's dramatic rally by global equity markets
down to the relaxation. [...]
The FASB was acting under pressure from Congress, which said it
may legislate if the board did not ease the rules.
The Centre for Investors and Entrepreneurs [at the Competitive
Enterprise Institute], which has been campaigning for a
suspension of mark-to- market accounting, welcomed the move.
Its director, John Berlau, said: "By itself, this change will
not make the price of mortgage assets higher or lower. Rather,
it will allow price discovery to occur. Mark-to-market
distorted the market by forcing banks to take losses on
mortgage assets even if the underlying loans were still
performing." [...]
Back when the stock market crashed in September,
Berlau opined that repealing mark to market would have a
salutary effect on markets. (Berlau's full Wall Street Journal
article is available here.)
Investors Business Daily editorialized
today that the mark to market rule, imposed on banks in
2007, forced them to mark down long-term assets as if they were
short-term based on present market conditions. The rule "severely
damaged banks' balance sheets, forcing them to shrink capital and
rein in lending." Bank assets "have had to be marked down to
market value even if loans are being paid on time." IBD
continued:
From the late 1930s to 2007, the U.S. banking system was
reasonably stable, with a few exceptions. One big reason for
this is the absence of mark-to-market.
The change of heart from FASB on mark-to-market was largely due
to Congress. We're happy to report that bipartisan pressure
undid the bad rule - a rare thing these days.
Mark-to-market rules, while well intended, have historically
been a problem. During the Depression, Nobel-winning economist
Milton Friedman noted, mark-to-market rules caused many banks
to fail. That's why FDR repealed them in 1938. Those rules had
remained dead until two years ago, when they were reimposed as
part of a frenzy of ill-considered financial reregulation.
