WASHINGTON – Rejecting a bid by corporate credit unions and other financial institutions, the Securities and Exchange Commission last week recommended against suspending fair value accounting, which is causing those institutions to report billions of dollars in unrealized losses on underwater assets.
The unrealized losses on the corporates’ books, which have grown to about $18 billion, exceed the capital held by the corporates by many multiples, so if even a tenth of those losses were realized it would erase all of the capital in the corporate network.
The corporate credit unions were lobbying the SEC to suspend fair value accounting for billions of dollars of asset-backed securities, mostly mortgage-backed securities, for which there is no active market, making it almost impossible to determine a fair, or market value for those investments. The SEC said the improvements should include "reconsidering the accounting for impairments and the development of additional guidance for determining fair value of investments in inactive markets, including situations where market prices are not readily available."
The SEC’s decision, while not directly affecting credit unions, is important because NCUA typically follows SEC guidance for credit union accounting.
Members United Corporate FCU, which has accrued $1.9 billion in unrealized losses on its portfolio, urged the SEC allow all financial institutions to report all financial instruments, except those carried for trading, at cost, rather than fair value.
"If the SEC does not wish to overhaul the current accounting model for financial instruments, at a minimum, the proposed agenda should consider amending the definition of fair value for available-for-sale and held-to-maturity securities to approximate net realizable value," said Todd Adams, chief financial officer for the $9 billion corporate, in a comment letter submitted to the SEC.
Several corporates reporting growing losses cited fears of a run on the corporate network by their credit union members. Laura Cloherty, vice president, controller of WesCorp FCU, which saw its assets decline to $22.5 billion from $31.3 billion in the past year, told the SEC they are working to dissuade their member credit unions from withdrawing funds.
"Our very great fear," said Cloherty, "is that if we are in a position where we have to record any other-than-temporary impairment, we will be forced to record unrealistic losses of a magnitude that will panic our members and will cause a run on deposits from which we might not recover. When accounting guidance creates distortions on the financial statements that have the potential to confuse and mislead readers regarding the economic condition of an entity and potentially cause business failure, then we believe there is something terribly wrong with the standards in place."
