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Government to clarify accounting rules for banks
AP Business Writer (AP:WASHINGTON) Federal regulators on Tuesday clarified accounting rules for banks in a way immediately embraced by the industry, which has been seeking relief that could boost its balance sheets in the financial crisis.46 minutes ago
By MARCY GORDON
The Securities and Exchange Commission and the Financial Accounting Standards Board issued clarifications to the current rules, and said more detailed guidance is coming later this week from the standard-setting FASB.
The banking industry, which has seen its mortgage-backed assets plummet in value, has been pressing the SEC to suspend the so-called "mark-to-market" accounting rules that require banks to value their holdings at current market prices, even if they plan to hold the assets for years. A possible addition to the $700 billion bailout bill being considered by Congress would reaffirm the authority of the SEC to suspend them.
But the head of a policy group backed by the biggest accounting firms warned lawmakers against such a suspension, saying it would hurt the interests of investors and the capital markets.
The principles of mark-to-market accounting "are rooted in the fundamental virtue of transparency and are central to informed market decisions and efficient allocation of capital," Cynthia Fornelli, executive director of the Center for Audit Quality, wrote in a letter to members of Congress.
The clarification issued Tuesday says that when an active market for a security doesn't exist, "the use of management estimates that incorporate current market participant expectations of future cash flows, and include appropriate risk premiums, is acceptable."
The guidance will apply to companies' financial statements for the just-completed third quarter. It is "intended to provide increased clarity related to the practices that may be used to determine an appropriate fair value in the light of current market conditions," said James Kroeker, the SEC's deputy chief accountant.
The arcane accounting rules even intruded into the battle for the White House, with Republican presidential contender John McCain's campaign lauding the SEC's release. Democrat Barack Obama's campaign did not immediately return requests for comment Tuesday evening.
The American Bankers Association also applauded the action, saying the new guidance "will help auditors more accurately price assets that are difficult to value under current market conditions."
McCain's campaign said he "is pleased to see that the SEC has finally decided to permit alternative accounting methods to mark-to-market accounting for securities where no active market exists. There is serious concern that these accounting rules are worsening the credit crunch, making it difficult for small businesses to stay afloat and squeezing family budgets."
5 thoughts on “The rules have changed again!!!! Only this time it may be a good thing.”
Thanks for the response Adam. For some background, we all were commenting that recently, after ech huge down day we've had more than just a small bounce "relief" rally. We figured people were making money using shorts, puts, and other downside strategies, and then buying good stocks cheap the next day (well, at least htat's what I've been doing)
No bailouts,,The market needs to crash and dump these so called officials on their butts and their pockets emptied and see what its like to actually produce something from their labor. They can't hurt me either way they have already stolen out of every dollar I make.
A relevant post, but it is a case of the Banks having had their cake and eaten it, now wanting to avoid paying for it. They loved the mark-to market rule when assets were increasing in value as it allowed them to expand credit by an order of magnitude. Now they want to bury their head in the sand. In the future when the dust has settled and Banks find themselves constrained by whatever mark-to-model they have found expedient to value these assets, you watch them change their assumptions about value so that they can start the whole credit expansion ball rolling again. You yourself says price action is king and that we should live and die by it, so should these bastards.
I was having a discussion with some friends of mine, and we came to the conclusion that with all of the hedging instruments available, it is almost impossible for the market to "crash."
What is your take?
Thanks for the question and feedback. My answer is nothing is impossible anymore given the nature of the global markets. If, and I say if, panic sets in then we have a real problem. Panic leads to irrational behavior which in turn leads to irrational trading decisions by traders. Let's hope this scenario does not play out. The big trend at the moment is down and I don't see that changing anytime soon.
We work years and years to develop a system that people can believe in and trust. Now, we change it in one day. The only ones who really benefit are the officers and directors who received their obscene bonuses and severance pays. They might make an example of one or two of them to placate the masses. The taxpayer who makes less than $60,000/year is left to clean up the dirt.
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