Tuesday, February 24, 2009

Why not suspend FASB's Fair Value Measurement Rule (157) for underwater assets?

Martin Baccardax, has an important suggestion on CNBC this morning “Here’s How to Fix This Mess”, the banking crisis, that is. He offers a proverb in Latin, Omnes viae Romam ducunt,” All Roads lead to Rome. Baccardax wants to let financial institutions suspend the FAS 157 rule. The link for his CNBC article is here.

FAS 157 is a rule from FASB, the Financial Accounting Standards Board, called the “Fair Value Measurements” rule. FASB’s link is here.

A key provision seems to be this: “This Statement emphasizes that fair value is a market-based measurement, not an entity-specific measurement. Therefore, a fair value measurement should be determined based on the assumptions that market participants would use in pricing the asset or liability.”

Imagine you have a car loan, and that your car has dropped in value when you drove it off the dealer’s lot. (It does.) Then imagine that your car finance company calls and demands that you make up the difference in cash right now, or the car will be repossessed. It doesn’t work that way with consumers, but it does with banks. That’s what Baccardax wants to see changed.

Financial institutions and life insurance companies run end-of-month batch accounting jobs to match their balance sheets to FASB rules. I remember computer jobs like that when I was working for a life company.

Baccardax relates FAS 157 to Rick Santelli’s “rant.” He says that the current housing plan effectively penalizes people who are current on their mortgages but whose houses are underwater. Baccardax blames FASB for the corruption of “moral hazard” in our financial system. This sounds like a debate we have heard before about "mark-to-market accounting".

So, why not suspend FAS 157. Can Geithner decide to do this himself?

Update: March 11, 2009

Reuters has a copy of the speech by Fed Chairman Ben Bernanke to the Council of Foreign Relations, "Financial Reform to Reduce Systemic Risk," link here. (I'll check later to see if the speech is within the public domain; it should be). Bernanke is hinting at revising some of the "mark to market" accounting rules.

The article by Annys Shin and Lori Montgomery on p A6 of The Washington Post is "Bernanke's Vision for Change: Fed Chief Calls for More Financial Oversight, Overhaul of Rules", link here.

I have a review of Ben Stein's comments on Larry King Live March 2, 2009 on my TV blog here.

Update: March 13, 2009

Floyd Norris has a New York Times "High & Low Finance" column (p B1) "Problem for Bankers? The Rules" about mark to market here. The article says that Rule 157 is not what requires mark to market; that came earlier. But Rule 157 further restricts how banks can value their assets.

Proposals include sliding scales and various disclosure levels that could complicated automated batch computer systems that the government is likely to write to regularly compute assets.

The banks want Congress to establish a new body to issue accounting regulations. How would this work overseas? The banks believe that the regulations helped bring on the crisis, although they may have been intended more to prevent Enron and WorldComm like situations in other kinds of companies.

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