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US: Investors, banks battle on fair value accounting

  Investors locked horns with the banking industry on Wednesday on whether US regulators should suspend or change accounting rules used to value assets such as mortgage-backed securities.


Fair value accounting, which requires assets to be valued at market prices, has been blamed for billions of dollars in writedowns by some US banks and policymakers. But investors and accountants say the approach gives investors a clearer window into banks’ balance sheets.

The US Securities and Exchange Commission was charged by Congress to produce a study by early 2009 analyzing the effects of fair value accounting rules on financial firms’ balance sheets and examining alternative accounting standards. The SEC held a public meeting on Wednesday to gather information on the accounting rules, also known as mark to market or FAS 157.

Charles Maimbourg, senior vice president of KeyCorp bank, told the SEC that what management intends to do with an asset should help determine the fair value of the asset. “You have to include management intent. They have opinions, they are in the best position to do that,” Maimbourg said.

Under the fair value rules, assets can be valued based on a simple price quote in an active market. But hard to value assets rely on management’s best estimate derived from computer models. Given that there is no market for certain securities such as those linked to mortgages, banks say they have been forced to value assets at fire sale prices they could fetch in the current market. That is misleading, they contend, because the banks do not plan to sell the assets immediately and their value could rise in the future.

“There are loans that banks hold and intend to hold,” said Maimbourg. “The fact that the market will only pay us 20 cents ... (is not) a reason to mark it down to 20 cents on the dollar.” Patrick Finnegan, a director at CFA Institute, disagreed and said allowing management intent to influence the value of an asset was an “insidious” idea. “We should let all changes in net assets occur in the balance sheet,” he said.

The SEC study was mandated under the government’s $700 financial services bailout law, which also lets the Treasury Department inject $250 billion into banks. Banks will exchange preferred stock and warrants for the government funds. So far, Treasury has infused $125 billion of capital into the nine largest banks such as Bank of America Corp and allocated more than $33 billion to smaller banks, including KeyCorp.

William Isaac, former Federal Deposit Insurance Corp chairman, said the mark to market accounting rules were negating the effect of the capital injections. “We have one hand of government handing out cash,” Isaac said. “And just as fast ... the SEC and (accounting rule maker the Financial Accounting Standards Board rule) is destroying it.”

Scott Evans, executive vice president with pension fund TIAA-Cref, and Vincent Colman, partner at PricewaterhouseCoopers, defended fair value accounting rules as a way to provide transparency for investors. Separately, Rep. Barney Frank, the chairman of the House Financial Services Committee, said that he favors more flexibility in applying the way companies value assets. Frank and other lawmakers plan to propose broad financial services regulatory reforms in 2009. (Reuters)