Fallout: The Financial Crisis

FASB moves on mark to market

Marketplace Staff Apr 2, 2009
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Fallout: The Financial Crisis

FASB moves on mark to market

Marketplace Staff Apr 2, 2009
HTML EMBED:
COPY

TEXT OF STORY

Steve Chiotakis: Last week, one branch of the government came up with a plan to get
toxic assets off the banks books and get them lending again. Today, another government branch could torpedo that plan before it’s even under way. The Financial Accounting Standards Board, or FASB, votes on whether to relax the rules on so-called “mark to market” accounting. What could the change mean? Here’s Marketplace’s Amy Scott.


Amy Scott: Let’s start with that term “mark to market” accounting. Banks have to report the value of the stocks and bonds on their books based on what investors might pay for them. Right now, they’re not paying much for anything. So consultant William Isaac says the accounting rule has forced banks to mark even healthy assets way down:

William Isaac: It has destroyed hundreds of billions of dollars of bank capital, and has made our economic downturn far more serious than it needed to be.

Banks would love to see FASB give them more leeway in valuing their troubled securities. But that could hurt the Treasury’s plan to get them to sell those assets to investors.

Jack Ciesielski publishes the Analyst’s Accounting Observer. He says when banks mark down their securities, they have to raise more capital to insure against potential losses. If suddenly they don’t have to raise that cash, Ciesielski says they may decide to hold onto the assets.

Jack Ciesielski: Why would you take the drastic step of selling them now, if you think you can just raise your capital or keep your capital intact with the stroke of a pen?

Not all of these assets are toxic. William Isaac points out many are still paying interest. He says if the banks were able to revalue those securities at a higher prices, they might be much more willing to unload the really smelly stuff at the prices investors are prepared to pay.

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

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