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Now that the Treasury Department has proposed its $700 billion bailout plan for the financial services industry, banking industry representatives are pressing regulatory officials to give them a break on one of the rules that bankers blame for causing the problem.
The banks are concerned that the government would pay an artificially low price for these assets, and they say that a strict application of SFAS No. 157, Fair Value Measurements, as Treasury buys the troubled assets would only add to the problems they've faced. The fear is that if the Treasury pays too low a price for the troubled assets, there will be still more writedowns of the remaining securities on bank balance sheets. The development was first reported by the Wall Street Journal.
The bankers have asked for a temporary modification to SFAS No. 157 at least until the market crisis has eased.
“The change should be a new subcategory within SFAS No. 157 that would be used in an illiquid market when folks are holding assets for long term markets,” said Melissa Netram, director of regulatory affairs for the Financial Services Roundtable, a trade association of banks, brokers, insurers, and asset managers.
But some accounting practitioners said that such a move would distort any remaining confidence that the banks’ financial statements accurately reflect market prices.
“I would think that the marketplace would see right through such poor reporting and would further discount the bank and financial institutions’ stock,” said Edward Trott, a former FASB member.
Netram said the necessary information about the effect of the market on the current value of the asset would be provided in footnote disclosures and the management discussion and analysis section of regulatory filings.
“This disclosure would include not only the securities that you are holding at this point, but why you think the market is illiquid and the effect of selling such securities in the market,” said Netram.
Netram made it clear, however, that the specifics of such a rule change would depend on the details of the final bailout plan.
“We haven’t worked out the details of how that is going to be applied to the current bailout,” said Netram. “There would be some type of valuation method that would be used that would be based on the expected future cash flows and the expected interest rate.”
Yet the same banks that are arguing that these assets are undervalued show little interest in buying them up, Trott notes.
“If the fair values of these mortgage securities are so ridiculously low, as some of the proponents of suspending fair value suggest, why is it that the [banks] aren’t buying these great bargains?” asked Trott.
Charles Mulford, an accounting professor at Georgia Institute of Technology in Atlanta, said that the current devaluation of the mortgage securities shows that without fair value rules, the situation could have been much worse.
“It’s offensive that you can blame fair value accounting and then make everything better by ignoring market declines,” said Mulford. “Fair value rules have done their job. I think the problems are less problematic than they would have been if we hadn’t had fair value. Without writing [the assets] down, the problem might have developed longer and taken much longer to surface because we wouldn’t have known.”
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