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Markets like new rules on asset prices

Traders work on the floor of the New York Stock Exchange during afternoon trading on April 2, 2009.

TEXT OF STORY

Kai Ryssdal: I'm going to have to do something here that we try really hard to avoid: Hit you with one of those phrases that Wall Street insiders like to throw around as if it's the key to all knowledge -- which, in this case, it might actually be. Mark-to-market accounting. It's a lot more simple than it sounds, as Amy Scott's going to tell us in a minute. But it's also pretty high on the list of things some people think are responsible for the financial part of this economic crisis. Today the folks who get to make up the rules on how companies keep their books eased back on marking to market. Here's Amy.


AMY SCOTT: Let's say you own a house. If you want to know how much it's worth, you see what people are paying for similar houses down the block. That's mark-to-market accounting. Putting a value on something based on what the market will pay.

Of course, you might think your house is worth a lot more than the market does right now. Banks feel the same way about some of their mortgage-backed securities. Today the Financial Accounting Standards Board voted to give banks more leeway in saying what some of those securities are worth.

John Gavin runs Disclosure Insight, a research service for investors. He calls the decision a disappointment.

JOHN GAVIN: If a company can essentially make up whatever numbers they want, that really compromises the integrity of those disclosures.

So why have bank stocks been going up since the accounting board first announced its proposal a few weeks ago? Analyst Stuart Plesser follows the industry for Standard & Poor's. He says investors seem to think bank earnings will look a lot stronger now. But he says those banks may be more inclined to report losses if they're not as bad.

STUART PLESSER: Ironically, this might even result in more impairment charges coming out.

The ruling today could also hurt the Treasury Department's efforts to get banks to unload their troubled assets to investors.

DAN RIPP: It kind of neuters Secretary Geithner's plan.

That's Dan Ripp. He's president of research firm Bradley Woods and Company. Ripp says if banks don't have to take heavy losses on their mortgage bonds, they may just hold onto them.

RIPP: There's a disincentive for banks to sell those securities at depressed prices when they can keep them on their balance sheets at higher prices by virtue of the new ruling.

Ripp agrees the accounting rules need to be fixed to more accurately portray what banks have on their books. But he says the timing of the new rule may prolong the pain.

In New York, I'm Amy Scott for Marketplace.

About the author

Amy Scott is Marketplace’s education correspondent covering the K-12 and higher education beats, as well as general business and economic stories.

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