SEC seen unlikely to suspend fair value

It is highly unlikely that the SEC will tell Congress that "mark-to-market" accounting should be suspended or scrapped when it finishes its 90-day study of the practice, according to industry observers.
OCT 12, 2008
By  Bloomberg
It is highly unlikely that the SEC will tell Congress that "mark-to-market" accounting should be suspended or scrapped when it finishes its 90-day study of the practice, according to industry observers. "It would be illogical" to suspend the mark-to-market rule, also known as fair value, said David Larsen, managing director at Duff & Phelps Corp., a financial advisory and investment banking firm based in New York. "Investors would have less information on which to make decisions." Meanwhile, the Securities and Exchange Commission and the Financial Accounting Standards Board have come under pressure from lawmakers and bankers to loosen the fair-value rules in an attempt to stabilize the country's deepening financial crisis and restore confidence in the credit markets. Removing or suspending this rule would be equivalent to storekeepers' suddenly removing the freshness date on cups of yogurt at the grocery store, Mr. Larsen said. If anything, the rule should be expanded, he said. It would make little sense to suspend a rule that gives investors more, rather than less, information, said Don Young, who served as a board member of FASB of Norwalk, Conn., from January 2005 to June. "Investors want transparency to underlying economics, and investors want to decide if the market volatility is noise or cause for concern," he said during a conference call sponsored by Toronto-based BMO Capital Markets Corp. "The No. 1 request that the board received [prior to drawing up the rule] from investor organizations was to move to a full fair-value model for all financial instruments." Indeed, a coalition of groups, including the CFA Institute of Charlottesville, Va., and the Center for Audit Quality and the Council of Institutional Investors, both of Washington, have issued statements urging the SEC not to suspend or rescind the rule. "[FASB] went through a multiyear process to develop that standard and considered input from all parties," said Jeff Mahoney, general counsel for the Council of Institutional Investors. "I don't think it would be helpful to the credibility of the standard-setting process for the SEC to suspend a standard that's gone through that full due process." A bipartisan group of more than 60 members of Congress kicked off the crusade when it fired a letter off to SEC Chairman Christopher Cox on Sept. 30 urging the regulator to suspend the rule. The government's $700 billion bailout package, approved this month, included a clause authorizing the SEC to suspend the rule and requested that the regulator conduct a 90-day study on the rule's impact on financial institutions. Lawmakers believe suspending or gutting fair-value accounting would go a long way toward easing the credit crunch that banks are facing. "We don't have a liquidity crisis; we have a credit crisis right now," Rep. Marcy Kaptur, D-Ohio, said during a recent news conference. It all has to do with the way assets are being valued, she said. Fair-value accounting, under FAS 157, "Fair Value Measurement," forces companies to put current market values on securities in their portfolios even if those securities will not be sold for years. This mark-to-market accounting has come under heavy criticism on Wall Street, as it forced many major banks to take hefty write-downs on securities and derivatives even though the firms had no plans to sell those securities in today's weak market conditions. Critics argued that finding fair- market values is often next to impossible in today's economic turmoil because demand for mortgage-backed securities and other structured-credit products has dried up, causing trading to grind to a halt. Often the only assets trading are heavily distressed ones that a company has to sell. As a result, critics complain that the mark-to-market prices are artificially low and overstate a company's losses. "I would like outright action taken today to suspend mark-to-market valuation," said Sue Allon, chief executive of Allon Financial LLC, a mortgage due diligence company in Denver. "It would take pressure out of the marketplace — that panic-driven emotion." Ms. Allon said banks, hedge funds and others have been forced to take write-downs that show paper losses, not real losses. "This contributed significantly to the ugly death spiral that has been playing out." Martin Sullivan, former chief executive of American International Group Inc., fueled the debate further when he told a House committee last week that the accounting rule played a big role in the New York-based company's collapse. "We were forced to mark our swap positions at fire-sale prices," he said. Some, such as billionaire investor Carl Icahn, chief executive of Icahn Enterprises LP of New York, believe that the solution is somewhere in the middle, where management should be able to look beyond current market prices to value assets in today's volatile markets. "Some of this stuff that they have on the balance sheet, if you marked it to market, would be ridiculously low," he said. "Not everybody in America is walking out of their homes. Not everybody in America is not paying their mortgages." Peter Fass, a partner at Proskauer Rose LLP in New York, agrees. "One of the significant causes of this crisis has been the belief that these things are worthless, when they aren't," he said. Mr. Fass believes that adjustments to the rule are needed, but scrapping it would be wrong. He said: "What do we do with all of the write-offs that occurred — would we bring them all up to par? Is that going to restore confidence?" The SEC and FASB, cognizant of the problem, recently issued a clarification statement on FAS 157 emphasizing that companies are not expected to value assets based on fire-sale prices in the market and could take into account discounted cash flows and other criteria when markets are inactive. E-mail Janet Morrissey at [email protected].

Latest News

SEC bars ex-broker who sold clients phony private equity fund
SEC bars ex-broker who sold clients phony private equity fund

Rajesh Markan earlier this year pleaded guilty to one count of criminal fraud related to his sale of fake investments to 10 clients totaling $2.9 million.

The key to attracting and retaining the next generation of advisors? Client-focused training
The key to attracting and retaining the next generation of advisors? Client-focused training

From building trust to steering through emotions and responding to client challenges, new advisors need human skills to shape the future of the advice industry.

Chuck Roberts, ex-star at Stifel, barred from the securities industry
Chuck Roberts, ex-star at Stifel, barred from the securities industry

"The outcome is correct, but it's disappointing that FINRA had ample opportunity to investigate the merits of clients' allegations in these claims, including the testimony in the three investor arbitrations with hearings," Jeff Erez, a plaintiff's attorney representing a large portion of the Stifel clients, said.

SEC to weigh ‘innovation exception’ tied to crypto, Atkins says
SEC to weigh ‘innovation exception’ tied to crypto, Atkins says

Chair also praised the passage of stablecoin legislation this week.

Brooklyn-based Maridea snaps up former LPL affiliate to expand in the Midwest
Brooklyn-based Maridea snaps up former LPL affiliate to expand in the Midwest

Maridea Wealth Management's deal in Chicago, Illinois is its first after securing a strategic investment in April.

SPONSORED How advisors can build for high-net-worth complexity

Orion's Tom Wilson on delivering coordinated, high-touch service in a world where returns alone no longer set you apart.

SPONSORED RILAs bring stability, growth during volatile markets

Barely a decade old, registered index-linked annuities have quickly surged in popularity, thanks to their unique blend of protection and growth potential—an appealing option for investors looking to chart a steadier course through today's choppy market waters, says Myles Lambert, Brighthouse Financial.