aimed at reducing the losses banks have been forced to report as the values of their mortgage-backed securities have crumbled

TO BE NOTED: From the NY Times:

"Banks Are Set to Receive More Leeway on Asset Values

By FLOYD NORRIS

Under intense political pressure, the board that sets accounting rules in the United States will meet on Thursday to complete changes in accounting rules that are aimed at reducing the losses banks have been forced to report as the values of their mortgage-backed securities have crumbled.

The changes, proposed two weeks ago after a Congressional hearing in which Robert H. Herz, the chairman of the Financial Accounting Standards Board, was essentially ordered to change the rules or face Congressional action, are generally supported by banks, although some want the board to go even further.

But they have produced a strong reaction from some investors, with one investor group complaining that the changes would “effectively gut the transparent application of fair value measurement.” The group also says changes would delay the recovery of the banking system.

“Investors,” wrote Kurt N. Schacht, the managing director of the Centre for Financial Market Integrity of the CFA Institute, “will not be willing to commit capital to firms that hide the economic value of their assets and liabilities.”

It seems highly unlikely that FASB will make major changes to the proposals that it rushed out only two weeks ago, but it may be willing to consider additional steps. And it will have to face the important decision of when to make the new rule take effect.

Some banks have requested that the board issue further guidance to make it easier for them to avoid writing down the value of assets, while some investors have asked for detailed disclosures to help them assess how far the newly reported values are from current market value.

The world of accounting rulemaking is normally a staid and slow moving one, with the board offering detailed rationales for changes and giving interested parties months to comment on them. Most comment letters come from people well versed in the accounting literature, arguing points that can seem arcane even if they could have a major impact on financial reports.

The process this time has been different in almost every respect. The board allowed only 15 days for comments, and said it would act after taking just a day to review the comments.

Those comments arrived by the hundreds, including bitter reactions from investors. “Market value is market value. Stop letting the financial industry call a duck a whale,” stated an e-mail message signed by Diane Walser.

“Who will benefit?” asked Roy Bell. “Only the very ones who already broke all the rules and have brought destruction to the world as we know it.”

The file also includes letters, evidently solicited by banking organizations, from groups contending that relaxing the rules would allow banks to report higher profits and make more loans.

The Georgia Affordable Housing Coalition submitted such a comment, perhaps without carefully reading it. The opening paragraph states, “This letter sets forth the comments of [insert name of organization here] regarding these proposals.”

The proposed rule interpretations deal with two issues in asset valuation. Banks are required to show some assets at market value, and report profits or losses based on changes in that value. Other assets may be reported at original cost, but if their value deteriorates they must be written down to market value if there is an “other than temporary impairment” in value.

The banks argue that current market values are unreasonably low, reflecting distressed trading, and are producing values that are well below the amount that will eventually be realized.

One change would allow banks much more room to conclude that inactive markets are distressed, allowing them to value the assets at what they believe they would be worth in a normal market. The other change would let banks avoid reporting some of the impairment losses on their income statements.

Some financial institutions want immediate action. The Association of Corporate Credit Unions asked the board to make the change retroactive, so that 2008 annual reports could be restated. Whatever the details of the proposal adopted Thursday, it represents an abrupt turnabout for the board. Only a day before the Congressional hearing on March 12, Mr. Herz gave an interview in which he disparaged what he called “mark to management” accounting. But after the Congressional grilling, the board quickly moved to make it much easier for banks to value assets at what they should be worth, rather than what they were currently selling for.

The CFA Institute reacted bitterly to that about-face. “Continuing on the path of politicized accounting standard-setting that caters to special interests,” it wrote, would make it hard for the board “to maintain its credibility.”

In some ways, the reversal is similar to one that the board made more than a decade ago, when it backed down under Congressional pressure from a rule requiring that companies report the value of stock options as an expense. That rule was revived only after corporate scandals early in this decade.

If the board does adopt the changes, they may quickly become universal. The International Accounting Standards Board, which sets rules for many countries, itself hurriedly changed an aspect of its market-value rule under pressure from the president of France."