Companies Get Leeway In Valuing Assets

The Financial Accounting Standards Board voted Thursday to ease so-called "mark to market" rules. That will give banks more flexibility on how they value toxic assets and will make bank balance sheets look healthier.

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MICHELE NORRIS, host:

This is ALL THINGS CONSIDERED from NPR News. I'm Michele Norris.

MELISSA BLOCK, host:

And I'm Melissa Block. The Dow Jones Industrial Average added more than 200 points today, nearly three percent, to close at its highest level in two months, and one of the big reasons for the surge appeared to be a vote taken by the Financial Accounting Standards Board. That's the body that sets accounting standards in the U.S.

The board gave into pressure from Congress and the banking industry and agreed to ease mark-to-market accounting rules. As NPR's Jim Zarroli reports, not everyone was happy with the move.

JIM ZARROLI: Mark-to-market accounting rules are enormously controversial, and some companies even blame them for making the recession worse.

The rules say that when a company owns an asset that has lost value, like a mortgage-backed security, it has to reflect that fact on its balance sheet, and that means it has to calculate how much the asset would fetch on the market at that time.

But critics say there are periods, like right now, when the market is so unpredictable that no one wants to buy anything. So deciding what an asset is worth becomes impossible.

Irving Daniels is with the Financial Services Round Table.

Mr. IRVING DANIELS (Financial Service Round Table): How do you put a proper valuation on an asset based on a market price when there's no market?

ZARROLI: The problem is that when companies have to keep re-pricing assets lower, it hurts their bottom line, and that's a big problem for banks in particular because when their asset base falls, they can't lend as much.

The change approved by the board today would give companies much more leeway over how they value assets. No longer will they have to determine what their assets would fetch in a market that's barely functioning. They just have to guess what they'd fetch in an orderly market.

The change will greatly improve bank balance sheets, at least superficially. Edward Kest(ph) is an accounting professor at Penn State.

Professor EDWARD KEST (Penn State University): Now the banks will have the opportunity, the golden opportunity for them, of being able to hide these losses.

ZARROLI: The change in the rules won qualified praise today from the American Bankers Association and the U.S. Chamber of Commerce. Gary Townsend is president of a hedge fund company that invests in banks.

Mr. GARY TOWNSEND: It reduces the likelihood that many banking institutions need to go and raise additional capital, and of course the value of so many of these companies, the market cap has been reduced so substantially that this is a signal for many to begin to wade back in.

ZARROLI: But former Securities and Exchange Commission Chairman Arthur Levitt criticized the decision. He noted that members of Congress had threatened to pass laws changing the rules if the accounting board didn't do so itself.

Mr. ARTHUR LEVITT (Former SEC Chairman): The worst part of what occurred today was the fact that it was forced by the politicians rather than the result of the kind of deliberative thinking that investors are entitled to.

ZARROLI: Levitt says the rule change will hurt investors by making it tougher for them to figure out what companies are really worth. Ed Kest agrees.

Mr. KEST: I find it ironic that we talk about wanting greater transparency in financial reports, and then we enable corporations to massage their numbers and manipulate them to show whatever they want.

ZARROLI: Still the rule change sent stocks up sharply today with financial stocks in particular gaining ground. After a year in which bank stocks have been in freefall, a lot of investors were grateful to see them rebound somewhat, whatever reservations they may harbor about how they did so.

Jim Zarroli, NPR News, New York.

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