EU group backs change to bank accounting rules

[Devilsbit]

The implications of this are serious, under the new Accounting system already agreed as of last week banks do not have to “revalue” Assets showing their true value.

An EU regulators’ committee in Brussels voted unanimously in favour of accepting the emergency changes made by the International Accounting Standards Board on Monday.

These changes will give banks more leeway in how they value certain assets whose prices have plunged.

Lawmakers in the European parliament then quickly endorsed the vote, while member states also gave their unanimous support.

This means the changes, which are optional, can now apply to calculations of banks’ third-quarter results if they wish.

Under the rule change, financial institutions would be able to “reclassify” certain instruments. This means they can move them from their trading books, where they must be marked at “fair”, or current, market values, to their banking books.

Here, they can be reported at amortised cost - so any further falls in market prices would not have to be reported, and any gains would be spread over the lifetime of the assets.

The IASB changes followed heavy pressure from European banks and politicians.

European companies had complained that US rules gave their American rivals greater flexibility.

The issue was picked up by EU finance ministers last week, who urged international accounting standard boards to work together and “welcomed the readiness” of Brussels to take appropriate action “as soon as possible”.

They demanded that the reclassification issue be solved by the end of the month.

However, there were fears discrepancies could arise between the approach taken by the London-based IASB and EU rulemakers, but that worry appeared to recede yesterday.

The financial community, however, remains divided about the wisdom of easing up on fair value accounting.

Those in favour include some banks and insurers who believe their balance sheets are being weakened unnecessarily.

Those against include many regulators, auditors and some investors, who think that using market prices reflects current economic reality, however harsh that may be.

-( Financial Times service)

© 2008 The Irish Times

[xman]

Oh noes, teh game isn’t working in my benefit anymore.

Well change the rules then

[Mark]

LOL. Great way to re-instil confidence and trust by making the books even less transparent. This is a tragi-comedy.

[mikewest]

Heard something about this on the radio this morning but promptly forgot about it because some git cut me off on the motorway. The comment was to the effect that companies would not be required to apply mark to market values to their assets in this accounting quarter. A month ago I wouldn’t have known what “mark to market” meant, thanks pinsters.

[Septic_Crank]

Already predicted here on the pin.

Rearranging deckchairs.

[CaveCanem]

Thought this article from WSJ a couple of weeks ago was a good overview. I can see both sides of this argument, but I can’t see how suspending MTM will increase investor confidence.

Is Debate Over Mark-to-Market Just a Waste of Time?
There has been a heated debate over suspending mark-to-market accounting rules that require a bank to report financial instruments on its balance sheet at the price they would fetch on an open market. But is the whole debate just a waste of time?

SEC Chairman Cox has power to change mark-to-market rules, but should he?
Critics of the rules say that they cause banks to undervalue assets that have a real value based on fire-sale prices in a frozen market. “A vast majority of mortgages, corporate bonds, and structured debts are still performing. But because the market is frozen, the prices of these assets have fallen below their true value. Firms that are otherwise solvent must price assets to fire-sale values. Not only does this make them ripe for forced liquidation, but it chases away capital and leads to a further decline in asset values,” wrote Brian Wesbury of First Trust Portfolios L.P. on the Journal’s editorial pages.

The sentiment was echoed by many lawmakers on both sides of the aisle. The outcry was strong enough to include a measure in the rescue package passed by the Senate that makes clear that the chairman of the Securities and Exchange Commission has the power to suspend mark-to-market rules.

While Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke haven’t supported a suspension of mark-to-market rules, their plan to buy troubled assets from financial institutions is based in part on a similar underlying assumption. Bernanke made clear last week in congressional testimony that the fire-sale price for these assets in the open market isn’t representative of the fundamental value. The Treasury proposal aims to create a market for these assets and unfreeze the system. If the plan works, mark-to-market rules wouldn’t have the same detrimental effect since the real values of these assets would become known.

Wesbury argues that the Treasury correction would take too long. “Because of government bureaucracy and legal issues, the first purchases by the Treasury plan will not be made for at least two weeks and possibly four weeks. Mark-to-market accounting changes could start the healing overnight and prevent the U.S. from moving further away from free-market capitalism,” he said.

On the other side of the debate, proponents of the rules argue that a suspension of mark-to-market rules would just be obfuscation that would allow banks to revert to shady accounting practices and just hide underlying liabilities. They also worry about the long-term implications. “Suspending FASB 157 [the mark-to-market rule] amounts to little more than an attempt to hide [a] broken business model from investors, regulators and the public. It’s not just getting through the next few quarters that matters; Rather, its allowing the market place to appropriately reallocate this capital to where it will serve its investors best. That is what free market capitalism is,” wrote Barry Ritholtz of Fusion IQ on his Big Picture blog.

The SEC and the Financial Accounting Standards Board clarified the mark-to-market rules in a bid to deal with the issue of frozen markets. The agencies said that in such cases, companies don’t have to rely solely on market prices, but can use judgment to value assets more accurately. This appeared to mollify some critics of the accounting rules, but hasn’t satisfied everyone.

In an excellent post on the Curious Capitalist blog, Justin Fox makes a point that may make the whole debate moot. “Investors and regulators and reporters and corporate executives need to learn not to take any financial reporting numbers, whether marked-to-market or not, at face value. The health of a bank or any corporation can never be adequately measured by a single bottom-line number. Understanding the assumptions and uncertainties inherent in accounting numbers is crucial to understanding how to use them,” he writes.

In the current environment, everyone seems to be taking Fox’s advice. That may be one reason why these markets are frozen in the first place. Even if mark-to-market rules are suspended immediately, it won’t change the makeup of a company’s balance sheet. Investors have decided that these assets are toxic and no matter how a bank accounts for them in its books, that sentiment isn’t likely to change unless investors see some proof that the instruments are actually undervalued. So far, there’s been little to suggest otherwise. –Phil Izzo

blogs.wsj.com/economics/2008/10/02/is-debate-over-mark-to-market-just-a-waste-of-time/

[jabaar]

bloomberg.com/apps/news?pid= … refer=home

Rubin fresh from resigning in failure if not disgrace

“Mark-to-market accounting has done a great deal of damage,” Rubin said. “For a lot of financial institutions we should move to something that is more similar to reserve accounting. That will be a very controversial matter.”

Under reserve accounting, assets like loans are carried at cost, offset by reserves for potential losses. Rubin was criticized by investors for collecting more than $150 million in pay in a decade while failing to steer Citigroup away from subprime mortgages.

Goldman Sachs Group Inc., where Rubin was co-chairman in the early 1990s and where he spent 26 years, is an advocate of fair- value accounting. Rubin left Goldman Sachs to become a top economic adviser to President Bill Clinton in 1993. In 1994, he succeeded Lloyd Bentsen as Treasury secretary, presiding over five years of economic growth.

“For us, fair value is the oxygen of the firm,” Matthew Schroeder, managing director for accounting policy at Goldman Sachs, said at a U.S. Securities and Exchange Commission public meeting in July. “It’s part of our fabric. We follow a daily discipline of marking to market at our firm. It can be done.”

SO the problem is mark to market, not the bundling of dubious assets, all wrapped up in a nice AAA rating. Go figure

[Arthur_Daley]

Yeah we can change the accounting rules to what ever you want guvnor. Just don’t come knocking on the door when credibility has flown out the window.