SEC Changes On The Table The Securities and Exchange Commission and the Financial Accounting Standards Board have issued a "clarification" that will allow companies to use their own models and judgment when markets are dysfunctional. The move follows calls from lawmakers.
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SEC Changes On The Table

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SEC Changes On The Table

SEC Changes On The Table

SEC Changes On The Table

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The Securities and Exchange Commission and the Financial Accounting Standards Board have issued a "clarification" that will allow companies to use their own models and judgment when markets are dysfunctional. The move follows calls from lawmakers.

ROBERT SIEGEL, host:

Now, more on something that Congressman Blunt alluded to, how do you place a value on a mortgage-backed security when there's no market for it? Current accounting rules force companies to, as it's called, mark to market. Assets that have lost value must be recorded at whatever price they might fetch if they were sold today - if they could be sold, that is. Critics of mark to market say these rules have helped cause the credit crisis because they have forced banks to record huge loses. And now, the SEC is changing some of those guidelines. NPR's Jim Zarroli explains mark to market.

JIM ZARROLI: Corporate accounting rules aren't something a lot of people spend time thinking about. But Ed Yingling, president of the American Bankers Association, insists they're at the root of the carnage in the financial world.

Mr. ED YINGLING (President, CEO, American Bankers Association): The mess we are in was started by the subprime crisis, but it didn't have to be anywhere near this bad.

ZARROLI: Under what's called mark to market accounting rules, companies have to record the value of all of the assets they hold on their books, and it has to be the current value, the amount they'd get if they went into the market to sell them right now.

The problem, Yingling says is that, right now, the market for a lot of these assets has become dysfunctional. There are all these mortgage-backed securities out there that are impossible to value. No one wants to buy that, and Yingling says, if banks have to record the current value of these securities on their balance sheets, they end up taking huge loses.

Mr. YINGLING: That means that their capital levels go down, and if their capital levels go down, it means they cannot grow. They cannot expand lending.

ZARROLI: And Yingling says this has happened all over the banking world, and it's a reason for the credit crunch. A lot of people take issue with that. Ed Ketz, an associate professor of accounting at Penn State, says the reason banks are in trouble is that they invested in a lot of risky securities.

Dr. ED KETZ (Smeal College of Business, Penn State): Much of the criticism against fair value accounting has been a smoke screen so that we don't hold bankers responsible for the mistakes they make.

ZARROLI: Whatever the case, some Republican congressmen are now pressuring the Securities and Exchange Commission to suspend mark to market, or fair value rules, at least until the crisis passes. They even tried and failed to get a suspension included in the bailout bill. But they did win a partial victory. The SEC issued a letter yesterday spelling out guidelines that appear to give companies a little more leeway to value assets as they see fit.

Mr. LYNN TURNER (Former Chief Accountant, SEC): I would almost say that the title on the letter could just about be pick a number, any number.

ZARROLI: Former SEC chief accountant Lynn Turner says, coming at a time when so many banks are in big trouble, these new guidelines send the wrong signal to corporate executives.

Mr. TURNER: It sets up a system where they can gain the system and report numbers that look better than what's really there.

ZARROLI: And Cindy Fornelli, who heads an industry group, the Center for Audit Quality, says any attempt to water down fair value accounting rules can only hurt small investors. Fornelli says they'll have no way of knowing whether a company's assets are fairly valued when they buy a stock.

Ms. CINDY FORNELLI (Executive Director, Center for Audit Quality): The investors are entitled to know the truth about the current value of these securities, even if it's bad news.

ZARROLI: But bankers say that's really the point. They say nobody really knows the current value of these securities right now. They say continuing to force banks to rewrite their balance sheets will only destabilize the industry further. Jim Zarroli, NPR News, New York.

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