- The Washington Times - Thursday, April 2, 2009

WASHINGTON (AP) - The board that sets U.S. accounting standards on Thursday gave companies more leeway when valuing assets and reporting losses, providing a potential boost to battered banks’ balance sheets.

The independent Financial Accounting Standards Board voted to adopt new guidelines under the so-called mark-to-market accounting rules, which require companies to value assets at prices reflecting current market conditions. The board was meeting at its headquarters in Norwalk, Conn.

The changes, which apply to the second quarter that began this month, will allow the assets to be valued at what they would go for in an “orderly” sale, as opposed to a forced or distressed sale.

The new guidelines also will allow banks to avoid reporting some losses on securities by splitting them among factors like fluctuating interest rates that won’t have to be counted toward net income or loss.

Two of the five FASB board members, Thomas Linsmeier and Marc Siegel, voted against the change in reporting of such impaired assets. They argued it was the sort of decision bank regulators should make, because it could affect banks’ capital positions, and that the FASB had been pressured by Congress to take it.

Financial stocks led a rally on Wall Street after the board voted to relax the rules. The Dow Jones industrial average added more than 250 points to 8,014 in midday trading, the first time it has not risen above 8,000 since Feb. 10. Broader indices also rose more than 3 percent.

In an ironic twist, the new leeway for banks could undercut the government’s new financial rescue program in which it is joining with private investors to buy up about $500 billion in toxic assets from banks, some experts say.

In the short run, banks would benefit by raising the value of the assets. But higher values could drive away prospective private investors _ who don’t like to overpay, even though the government will absorb most of the risk.

If the assets remain on banks’ books, they may continue to be reluctant to lend as they fret over the assets’ future performance. That could work against the purpose of the government’s program: to break the logjam in lending and get the economy pumping again.

The mark-to-market rules have forced banks to take steep write-downs on some assets, especially securities tied to high-risk subprime mortgages, as the industry has reeled from the housing market slump and banks have foundered and failed. The banking industry and lawmakers of both parties have been pushing for the rules to be relaxed, but the changes have provoked fury among many investor advocates and analysts.

“Our reaction is that this decision decreases transparency and allows financial institutions to use fictional valuations on many of their toxic assets,” Joshua Shapiro, chief U.S. economist at MFR Inc., said Thursday in a research note. “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.”

An estimated $2 trillion in soured assets is gumming up banks’ books.

“Banks need to have flexibility” in valuing assets but the fair market rule shouldn’t be scrapped, Sheila Bair, the chairman of the Federal Deposit Insurance Corp., told a gathering of bank executives Wednesday. “There needs to be integrity in those bank balance sheets.”


AP Business Writer Rachel Beck in New York contributed to this report.

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