WASHINGTON – As part of the bailout of the mortgage markets, the bankers are lobbying Congress to halt by the end of the month requirements that financial institutions mark the value of their holdings at fair market value.
In a continuation of a two-decade debate, many in the financial markets blame the so-called fair value accounting rules for much of the balance sheet problems that have piled up over the last year.
Under fair value, or mark-to-market, accounting, banks, credit unions and other entities must report the changes in values for all of their holdings for each reporting period, quarterly for most, monthly for others. Entities may report their holdings at book value but only if they intend to hold them to maturity and not sell them before.
But the diminution of certain markets in recent weeks, especially the mortgage backed securities markets, have made it difficult, if not impossible, to ascertain a market value for many instruments, depressing values even more. The market for so-called private label mortgage securities has been at a virtual standstill lately, with almost no trading going on.
“How do you come up with a true market value for something for which there is no market,” asked Geoff Bacino, member of the Board regulating the Federal Home Loan Banks and a former NCUA Board member.
What’s more, complex entities, such as Fannie Mae, Freddie Mac and large banks, have long complained that the constant shifts in market values resulting from major incidents, whether a Lehman Brothers bankruptcy or the Sept. 11 attacks, create constant volatility in balance sheets and unintended consequences. In fact, Fannie and Freddie were among the most vocal critics when the rules on market value accounting were adopted by the Financial Accounting Standards Board.
Entities such as big banks and corporates credit unions, which hold billion-dollar investment portfolios, are constantly checking and revaluing their balance sheets, especially during market upheavals like the current one.
Corporate credit unions, for example, have seen their balance sheets impacted by billions of dollars in unrealized losses on their mortgage backed securities, which they must report under fair value accounting. But if they succeed in holding those securities to maturity they would be allowed to report them at book value, which would erase most of those losses.
The American Bankers Association yesterday was calling on Congress to suspend fair market accounting rules as part of the mortgage bailout bill making its way through Congress.
“It is important for Congress to consider how current and proposed ’fair value‘ and other accounting rules are exacerbating the problems in the financial markets,” said the ABA in a letter sent to all members of Congress Monday. “For example, it is difficult, if not impossible, to determine ’fair value‘ in an environment where the market is illiquid and there are few participants.”
“To remedy this situation, the Securities and Exchange Commission should take action prior to Sept. 30 to recognize that it is virtually impossible to establish fair value in this environment,” the bankers said.
CUNA said it also is concerned about the impact of fair market accounting on credit unions and said the issue should be reviewed as part of the debate of the mortgage bailout.
“Credit unions have been saying that the market-to-market regulations instituted by FASB have been a continuing factor in lower values,” said Mary Dunn, vice president of regulatory affairs at CUNA.
