WASHINGTON – The board that sets U.S. accounting standards on Thursday gave companies more leeway in valuing assets and reporting losses. The changes should help boost battered banks’ balance sheets, but the rules may undercut a new financial rescue program.
Some experts and industry officials said the move will help resuscitate banks, allowing them to increase earnings and carry less capital as a buffer against potential losses. That should lead to more lending and help get the economy pumping again.
But others said the changes by the Financial Accounting Standards Board could undermine a crucial new rescue program mounted by the Obama administration, in which the government is joining with private investors to buy from banks hundreds of billions of dollars in toxic assets – especially the securities tied to high-risk subprime mortgages at the heart of the financial crisis.
In the short run, banks would benefit by raising the value of the assets. But higher values could drive away prospective private investors – who don’t like to overpay, even though the government will absorb most of the risk.
“I do think the timing is terrible,” said Sue Allon, the CEO of Allonhill in Denver, who works with hedge funds and investment banks to price assets.
Ideally it would have been better for the program to have been started up and producing “some lift” to prices before FASB made its move, Allon said.
The FASB board’s action helped fuel a buying surge on Wall Street, lifting the Dow Jones industrial average about 300 points in a rally led by financial company stocks. But stocks finished below their highs of the day, and as the initial ebullience sparked by the accounting move wanes, investors may be less optimistic over its long-term implications.
The FASB issued new guidelines under the so-called mark-to-market accounting rules, which require companies to value assets at prices reflecting current market conditions. The changes, which apply to the second quarter that began this month, will allow the assets to be valued at what the banks project they might sell for in the future, rather than in the current, distressed environment.
An estimated $2 trillion in soured assets is weighing on banks’ balance sheets. The mark-to-market rules have forced banks to take steep write-downs on subprime mortgage securities and other toxic assets, as the industry has reeled from the housing market slump and banks have foundered and failed.
The new guidelines remove the presumption that if there isn’t a current active market for assets, they must automatically be considered distressed. They also will allow banks to avoid reporting some losses on securities by splitting them among factors like anemic markets or fluctuating interest rates that won’t have to be counted toward net income or loss.