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Lawmakers Grill FASB Chairman

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Members of a House panel today clashed over efforts to press the Financial Accounting Standards Board to address concerns about “mark to market” accounting rules.

The hearing was organized by the House Financial Services capital markets subcommittee.

Several members said FASB, Norwalk, Conn., should ease mark-to-market rules as quickly as possible.

“Don’t make us tell you what to do,” said Rep. Randy Neugebauer, R-Texas. “Just do it. Just get it done.”

Rep. Alan Grayson, D-Fla., accused the critics of mark-to-market accounting of wanting to “shoot the messenger” for bearing bad but largely accurate news about the state of U.S. financial institutions.

“There seems to be a clamoring for changing the mark-to-market rules from institutions that seem to be insolvent,” Grayson said. “There seems to be a pattern here. … They don’t want to change the rules in the middle of the game. They want to change the rules when the game is already over.”

Mark-to-market accounting rules require banks, insurers and other entities to record some of the securities in their holdings at the curent “market value” every quarter, rather than assuming that the value at the time of purchase continues to be the correct value.

Witnesses at the hearing focused mainly on the effects of mark-to-marketing rules on banks and banks’ industrial borrower customers.

In October, at a U.S. Securities and Exchange Commission panel discussion on mark-to-market accounting, Bradley Hunkler, a representative for the American Council of Life Insurers, Washington, said he believed rigid use of mark-to-market accounting also has caused unnecessary fluctuations in life insurers’ balance sheets.

Subcommittee members said today at the capital markets subcommittee hearing that bank examiners are forcing banks to value assets at low prices set by dysfunctional markets, cutting off the flow of loans to factories.

Rep. Barney Frank, D-Mass., chairman of the House Financial Services Committee, said the U.S. Securities and Exchange Commission, the Office of the Comptroller of the Currency and FASB should use whatever authority that they believe they already have to be more flexible about applying mark-to-market accounting rules, and that they should tell lawmakers if they need help with statutory requirements.

“You have our assurance that we’re ready to remove statutory obstacles,” Frank said.

FASB has been working on guidance requested by the SEC to tell users of U.S. Generally Accepted Accounting Principles, including mark-to-market standards, how to apply the mark-to-market accounting rules to distressed assets in illiquid markets.

Rep. Gary Ackerman, D-N.Y., said Congress could enact a bill that would change U.S. accounting laws as early as April, and he insisted that FASB Chairman Robert Herz tell him that FASB could issue its mark-to-market accounting guidance sooner.

“If you don’t act, we will,” Ackerman said.

“I’ve heard you very clearly,” Herz said.

Herz said he believes FASB rules already clearly permit GAAP users to record assets affected by mark-to-market rules at values other than the price recorded for the “last trade” of a comparable asset.

GAAP users can and should use cash-flow accounting to value assets when markets fail to provide realistic valuations, but, in the real world, many financial services companies and regulators do not have much expertise in cash-flow modeling, and they seem to be more comfortable with “last trade” figures, Herz said.

Rep. Spencer Bachus, R-Ala., said FASB should give examiners and others “cover” by providing clear-cut rules encouraging use of cash-flow modeling, to reduce the fear that use of cash-flow modeling might lead to lawsuits.

Herz said he agrees on the need to adjust the way mark-to-market accounting rules are used but believes the fundamental problem is confusion about how much assets such as collateralized debt obligations really are worth.

In discussions with Grayson, Herz said stock market valuations of banks and the prices acquirers are paying for banks suggest that investors believe banks’ current valuations of their assets are too high, not too low.

Links to copies of the written versions of the testimony and other information about the hearing are available here.


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