Date registered: Mar 2006
Vehicle: 1999 ML320
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Congress takes a hard look at marking-to-market
By Matt Andrejczak, MarketWatch
Last update: 3:26 p.m. EDT Sept. 29, 2008
SAN FRANCISCO (MarketWatch) - Congress is looking at playing with mark-to-market accounting rules as part of the now-stalled $700 billion-dollar bailout plan for the U.S. financial system.
A provision in the bill, whose adoption was in doubt after the House of Representatives rejected it Monday, gives the Securities and Exchange Commission the right to suspend -- by rule or order -- mark-to-market accounting under Statement Number 157 of the Financial Accounting Standards Board.
The SEC would be allowed to step in front of mark-to-market accounting standards if it was in the public interest and consistent with the protection of investors, the House bill said.
As of Monday afternoon, House Democrats were trying to rescue the failed bill after more Republicans than Democrats opposed it.
Mark-to-market accounting, or "fair-value" accounting, is cited as one of the major reasons for the meltdown in the U.S. banking system. The rule, which went into effect Nov. 15, 2007, forces financial institutions to put a fair value on their assets or liabilities each quarter.
And this year, the accounting rule has wiped out well over $100 billion in asset-values tied to home mortgages and loans issued to finance acquisitions.
Using this method, the value of those assets is determined by what sales-price those assets would fetch in the current marketplace from a buyer, not based on the price a seller would hope to get. This kind of bookkeeping crushed Wachovia Corp. shares Friday.
J.P. Morgan Chase wrote down $30 billion of Washington Mutual's mortgage-related assets when it bought WaMu's banking business last Thursday night. This spooked Wachovia investors since Wachovia held a portfolio of similar mortgage portfolio that had been valued at a higher price. Citigroup acquired Wachovia's banking operations on Monday.
Also in the bill that House leaders are trying to revive: Congress is asking the SEC to conduct a study on what impact mark-to-market accounting has had on the recent bank failures and the balance sheets at financial institutions. A report would be delivered to Congress 90 days after the bailout pass is passed.
Investor Barry Ritholtz, CEO at Fusion IQ, said mark-to-market rules should be left alone.
"It seems to be pulled straight from the Bank of Japan's playbook: Take the right downs later rather than sooner, once the market returns to normalcy. That's a deeply flawed philosophy," Ritholtz wrote on his Big Picture blog.
Other critics included former SEC Chairman Arthur Levitt and Lynn Turner, who worked as the SEC's chief accountant during part of Levitt's tenure.
"To ask for a suspension in fair-value accounting is to ask the market to suspend its judgment," Levitt and Turner wrote in a Wall Street Journal opinion piece. "By reporting assets at what they are worth, not what someone wishes they were worth, investors and regulators can (see) how management is performing."
The bailout package and the fair-value accounting provision may never come to pass.
Monday afternoon House Democrats were hoping to come up with a new plan. Any legislation would have to be adopted by the Senate and then signed into law by President Bush. The Senate was expected to meet this week on the bill.
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