Fair-Value Tweaks Afoot?

Investors apparently think so, rewarding financial firms' stocks today based on speculation that the stimulus package will bring changes to mark-to...
Sarah JohnsonFebruary 5, 2009

Add fair-value accounting rules to the many projects and concessions stuffed into the giant stimulus bill currently being debated on Capitol Hill.

At least that’s the hope of many financial services firms that blame accounting standards for massive write-downs of their mortgage-related assets. Last night, Sen. Christopher Dodd, who chairs the influential Senate Banking Committee, reportedly suggested the existing rules could be suspended temporarily or modified.

According to Reuters, Dodd told reporters that a former banking regulator has ideas on how to make changes without interfering with the gist of the original standards. A Dodd spokeswoman did not immediately return’s request for comment.

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Then this morning, financial-sector stocks saw a “robust reversal,” largely because of the prospect that the rules could finally be changed after more than a year of pleading by bankers, says Peter Kenny, managing director of Knight Equity Markets. At 10 a.m., financial exchange-traded funds — pools of stocks linked to an index — rose by 8 percent, from 854 to 927.

Still, bankers had their hopes dashed the last time Congress waved the possibility that fair-value rules could face the knife. Only a few months ago, the Emergency Economic Stabilization Act gave the SEC 90 days to study the effects of fair value and the authority to suspend the rules.

But, with just a few weeks left in chairman Christopher Cox’s tenure, the commission declined to take up Congress’ offer to put a stop to the rules, saying investors find mark-to-market accounting gives them the best view into the current value of their companies’ assets. “General-purpose financial reporting should not be revised to meet the needs of other parties if doing so would compromise the needs of investors,” the SEC’s report said. 

Of course, this time there’s a new administration. Last month, Paul Volcker, one of President Obama’s top economic advisors, called for a fresh look at mark-to-market rules.  Commercial banks should be allowed to use a more flexible and principles-based system when gauging the worth of their assets and liabilities, Volcker said.