SEC eases reporting standard for banks
Under pressure from banks and legislators, the Securities and Exchange Commission issued an interpretation of an accounting standard that is likely to make it easier for banks to report smaller losses, or perhaps even profits, when they announce results for the third quarter, which ended yesterday.
The move drew praise from the American Bankers Association, which had complained to the SEC that auditors were forcing banks to value assets at unrealistically low "fire sale" prices, rather than at the higher values the banks believe the assets should be worth in an orderly market.
Some congressmen had pressed to order a suspension of the fair-value rule, known as SFAS 157, as part of the bailout bill that the House defeated on Monday but that may be revived later in the week. That bill stopped short of that, but did require a study of the rule and authorized the SEC to suspend it.
By moving when it did, the commission's chief accountant, who issued the statement jointly with the staff of the Financial Accounting Standards Board, which adopted the rule, may have reduced the pressure to drop the rule and made it easier for some legislators to switch their positions and support the bill in the next vote.
Analysts argue the problem was caused by the banks' purchase of risky assets, not by disclosing their depressed market values.
In a report earlier this year, Dane Mott and Sarah Deans, analysts for JPMorgan, argued that "blaming fair-value accounting for the credit crisis is a lot like going to a doctor for a diagnosis and then blaming him for telling you that you are sick." Mott did not return a call seeking comment.
Companies have long been required to mark many financial assets to their fair value, but rule 157 clarified how that was to be measured, saying that market values should be used if they are available.
Many mortgage securities have plunged in value, forcing large write-offs by institutions that own them. Bankers say the current market prices are far below what the securities should be worth, and that they should not be forced to take write-downs that are sure to be reversed later. 