IN FIRING their bazookas at the crisis, policymakers have blown holes in rules on everything from share trading to competition policy. It is therefore a miracle that fair-value accounting standards have not been hit too, in particular the requirement that banks “mark-to-market” most of their financial assets other than loans. These rules are deeply unpopular with many firms that have suffered losses and impaired capital positions. They would prefer to recognise losses in the traditional way—that is, slowly and when it suits them. More controversially, some argue the rules have created a vicious cycle of forced sales and falling prices.
Now, however, politicians have brought the accounting regime directly into their line of fire. In America the revised bail-out package being considered by Congress would give the Securities and Exchange Commission (SEC), the stockmarket regulator, the power to suspend fair-value rules. Perhaps to pre-empt this, on September 30th, the SEC and the body which it licenses to set the rules, the Financial Accounting Standards Board, issued new guidance on fair value. This appears to make it easier for firms to argue that the market for a given asset is “distressed”. In such circumstances they can put much less emphasis on market prices.
The situation is more complex in Europe and other territories governed by the International Accounting Standards Board (IASB). The SEC is answerable to Congress, but there is no easy legal mechanism by which to turn up the heat on IASB, which is a private body. That has not stopped politicians from trying; Nicolas Sarkozy, the French president, reportedly sent a proposal to the European Commission that recommends suspending fair value, which he argues leaves bank balance-sheets “at the whim of speculators”. The commission may be receptive—Sir David Tweedie, IASB’s chairman, says that it mandated the use of international standards in Europe “with great courage and in total ignorance of the effects of its decision”.
Is it the beginning of the end for fair value? That seems unlikely. Standards setters will resist anything beyond tinkering with the rules. They will be supported by institutional investors and accounting firms. And anyway it now seems unlikely that suspending fair value would make much difference. The credit crunch has moved on, in the words of one banker, “from a mark-to-market phase to a more traditional phase of credit losses”. The recent forced sale of Wachovia, America’s fourth-largest commercial lender, reflected concerns about its loans, which banks almost always carry using historic-cost rules, not fair value. If mark-to-market accounting really does react too fast to the market, politicians may have responded too late.