Mark to Myth

So are we back to flair value and marking to myth? After months of badgering from Congress, America's accounting standard-setter has relented. Holders of financial instruments will now have more latitude to value them according to their own cash flow models, rather than using observable prices, when markets are "distressed" or "inactive".

US banks may be able to ease up on the huge charges for troubled assets they have taken for the past six quarters. Make no mistake - this was a rush job. But that the Financial Accounting Standards Board received more than 600 letters commenting on the proposals in the accelerated process shows investors at least had some say. That resulted in less wiggle room for banks wishing to disregard market prices, as well as more regular detailed disclosure of banks' methods in applying the rules.

The American Bankers Association, which pushed legislators to demand the board make changes, praised the board. “Today’s decision should improve information for investors by providing more accurate estimates of market values,” said Edward Yingling, the association’s president.

One change adopted by the board would require banks to disclose the effect of the changed interpretation, although the final wording has not been released and it is not clear how detailed that disclosure will be.

For some other assets, banks must write them down to market value only if they conclude that the decline is “other than temporary.” The measure that drew dissents will allow banks to keep part of such declines off their income statements, although the decline would still show on the institutions’ balance sheets.

One of the dissenters, Thomas J. Linsmeier, argued that accounting rules already allowed the “fiction all banks are well capitalized,” adding that the changes would “make them seem better capitalized.”

The vote drew condemnation from an organization called the Investors Working Group, and the two former S.E.C. chairman who lead it — William H. Donaldson, appointed by the second President Bush, and Arthur Levitt Jr., who served in the Clinton administration.

“In order to create high-quality accounting standards, it is critical that the process be independent and free from political pressure,” the group said in a statement. “This will ensure that such standards are neutral and faithfully represent economic reality. To the extent that these new FASB proposals reduce the free flow of transparent and reliable financial information, they undermine investor interests and weaken their ability to make sound investment decisions.”

(from Financial Times and New-York Times)