Thursday, April 02, 2009
WASHINGTON —The board that sets U.S. accounting standards on Thursday gave companies more leeway in valuing assets and reporting losses. The changes should help boost battered banks' balance sheets and financial stocks rallied on Wall Street, but the rules may undercut a new financial rescue program.
Some experts and industry officials said the move will help resuscitate banks, allowing them to increase earnings and carry less capital as a buffer against potential losses. That should lead to more lending and help get the economy pumping again.
But others said the changes by the Financial Accounting Standards Board could undermine a crucial new rescue program mounted by the Obama administration, in which the government is joining with private investors to buy from banks hundreds of billions of dollars in toxic assets _ especially the securities tied to high-risk subprime mortgages at the heart of the financial crisis.
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.
"I do think the timing is terrible," said Sue Allon, the CEO of Allonhill in Denver, who works with hedge funds and investment banks to price assets.
Ideally it would have been better for the government-backed program to have been started up and producing "some lift" to prices before FASB made its move, Allon said.
Joshua Shapiro, chief U.S. economist at MFR Inc., was more blunt, saying the FASB decision "allows financial institutions to use fictional valuations on many of their toxic assets" and further obscures their "true position."
But Marc Chandler, an analyst at investment firm Brown Brothers Harriman, said the move was "consistent with easing the strain on the banks."
"The net impact could help boost bank earnings, reduce the need for capital injections (into banks by the government) and may help encourage participation" by private investors in government programs for selling toxic assets, he said.
The FASB board's action helped fuel a buying surge on Wall Street, lifting the Dow Jones industrial average about 300 points in a rally led by financial company stocks. But stocks finished below their highs of the day, and as the initial ebullience sparked by the accounting move wanes, investors may be less optimistic over its long-term implications.
At one point the Dow indicator broke through the 8,000 level for the first time since early February. It finished more than 216 points higher at 7,978.08.
The FASB issued new guidelines under the so-called mark-to-market accounting rules, which require companies to value assets at prices reflecting current market conditions. The changes, which apply to the second quarter that began this month, will allow the assets to be valued at what the banks project they might sell for in the future, rather than in the current, distressed environment.
Still, investor advocates and other critics assailed the FASB, which took the action _ with some dissension _ at a public meeting of its five-member board at its headquarters in Norwalk, Conn. The critics said the board had sacrificed its independence and buckled to pressure from lawmakers carrying water for banking industry interests.
The FASB received hundreds of comment letters opposing the moves in the two weeks since it proposed them from mutual funds, accounting firms and others contending they would damage honest financial reckoning by masking the deficiencies and risks lurking within the system.
A House panel last month wrung a pledge from FASB Chairman Robert Herz to try to issue guidelines in three weeks that would relax the mark-to-market rules to bring relief to the nation's banks in the financial emergency. The head of the House Financial Services subcommittee, Rep. Paul Kanjorski, D-Pa., had held out the threat of legislation to pressure the standard-setting board to take the steps.
The normally low-profile organization was put on the defensive. "These are extraordinary times and the FASB has responded swiftly to the critical needs of the capital markets," Neal McGarity, a FASB spokesman, told reporters after the votes.
He said the changes "were already in our plans and thinking well ahead of" congressional calls for action.
An estimated $2 trillion in soured assets is weighing on banks' balance sheets. The mark-to-market rules have forced banks to take steep write-downs on subprime mortgage securities and other toxic assets, as the industry has reeled from the housing market slump and banks have foundered and failed.
The new guidelines remove the presumption that if there isn't a current active market for assets, they must automatically be considered distressed. They also will allow banks to avoid reporting some losses on securities by splitting them among factors like anemic markets or 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. Siegel said "the pressure keeps on coming back to us." They argued it was the sort of decision federal bank regulators should make, because it could affect how much capital banks would need to hold, and that the FASB had been pressured by Congress to take it.
"This is a huge mulligan for banks with junky securities," said Jack Ciesielski, an accounting expert who writes the financial newsletter The Analyst's Accounting Observer.
A key concern is the impact of the changes on the government's new program in which it is joining with private investors to buy up about $500 billion in toxic assets from banks.
With the banks now able to keep assets impaired by market factors from affecting their bottom line, they'll be more likely to hold onto them. "Buyers will be willing to buy them," possibly at less than 30 or 40 cents on the dollar, Allon said. Some investors prefer a mix of higher- and lower-quality assets, she noted.
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, which would hurt consumers and small businesses caught in the credit squeeze.
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