Regulatory agencies moved on two fronts yesterday to help banks caught in the financial crisis. The first move -- asking Congress to increase the FDIC guarantee on deposits to $250,000 -- was so popular the presidential candidates fought to take credit. The second move was trickier and potentially more controversial down the line.
The SEC and a government accounting board relaxed a rule that requires banks to value their investment to market prices. Instituted last year, the mark-to-market rule requires companies to list their assets at whatever price similar assets are selling for on the open market.
Of course, assets -- such as the fancy mortgage-backed securities -- have been selling lately (if there are any buyers at all) at massively discounted prices. So banks have been arguing that the current prices undervalue the investments and force banks to show higher losses on their books than they will ultimately take. Hence, they have been lobbying hard to suspend the rule.
Despite the pressure, the SEC yesterday did not suspend the rule. But it did issue a "clarification" stating that when "an active market" doesn't exist for an asset, banks can craft their own estimates. The mark-to-market rule had such a provision before, but as the New York Times' Floyd Norris explains, yesterday's announcement makes the wiggle room a bit wider.
Given the modesty of yesterday's move, there was relatively little criticism of the clarification itself.
But the banking industry is looking for more than a clarification. It wants to have far more flexibility in booking the prices of their assets. Republicans in the House agree and have pushed for suspending the mark-to-market rule. The Bush administration has so far resisted doing that, but yesterday's announcement was, as the Washington Post notes, a kind of "trial balloon" meant to relieve pressure to suspend the rules.
While a suspension might win more GOP House votes -- and indeed at least a few economists do think the rule has helped fuel the crisis -- a suspension would also face intense criticism from, among others, auditors and accountants.
"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," one JP Morgan Chase analyst wrote in a report yesterday.
