Banks pressed for it, and investor advocates pushed back as fiercely. But in the end, the relaxation of mark-to-market accounting rules appeared to have little impact on banks' first-quarter results.
"Minimum relief" was how PNC Financial Services Group Inc. described the effect of the new Financial Accounting Standards Board guidelines. "No material impact" was Citigroup Inc.'s assessment of how FAS 157-4, as the change is labeled, altered its valuation of mark-to-market assets. On JPMorgan Chase & Co.'s conference call, when executives reported "essentially no impact" from the relaxed FASB rule, one analyst was compelled to seek clarification on whether the banking company had even adopted the new accounting treatment.
"It was adopted, and it had no impact," chairman and chief executive officer James Dimon replied. "The whole thing was a big hullabaloo about nothing, in my opinion."
Perhaps. But the debate over mark-to-market accounting — which pitted banking industry lobbyists and sympathetic politicians against the likes of former Securities and Exchange Commission chairmen Arthur Levitt Jr. and William H. Donaldson — may yet have legs.
FAS 157-4 gave new guidance on determining whether a market is active, and it increased the flexibility companies have when valuing illiquid assets. In a somewhat less controversial move, the FASB also relaxed its rules on other-than-temporary asset impairments, forcing companies to take charges against earnings only for credit-related impairments. Both changes officially take effect this quarter, though most large banking companies started using the new standards in the first quarter, under the FASB's early-adoption provision.
But if there are any adjustments in a bank's mark-to-market valuations, most of the impact would flow through to the balance sheet, not the income statement. So even with earnings season behind them, investors still lack a full view of how the accounting change was carried out by the banks that adopted it in the first quarter.
Wells Fargo & Co. — an exception among large banking companies in that it advertised a big valuation adjustment as a result of the new mark-to-market approach — showed how the rule change can dress up a bank's books without materially affecting earnings. Wells said the rule change shrank its losses on securities available for sale by nearly $4.4 billion in the first quarter while having no real impact on income.
"It didn't affect earnings, but it sure helped them get to that 3.28% tangible common equity ratio," up from 2.86% in the prior quarter, said Frederick Cannon, the chief equity strategist at KBW Inc.'s Keefe, Bruyette & Woods Inc.
In the 10-Q regulatory documents to be filed in coming weeks, banking companies will show — in far more explicit detail than they ever had to provide before on a quarterly basis — their fair-value estimates for certain assets, along with information on how the estimates were calculated.
Skeptical investors will be wary of any sign that accounting games helped banks minimize losses, Cannon said. They also may look at the forthcoming stress test results for clues as to whether regulators are discounting, or embracing, the impact of any changes.
Just the prospect of that type of scrutiny may have been enough to persuade banks to stick to the very strictest interpretations of the new rules.
"Before, you could say that there are just three objective ways of looking at [asset categorizations by level] and then use the one that makes the most sense. Now you have to be concerned [that] people think you're using the one that makes you have the smallest losses," said H. David Sherman, an accounting professor at Northeastern University.
So why were banks so eager for the changes?
"I think what some people were hoping for [was a decision that], when you're in those illiquid markets, there would be either a recognition that the measure of fair value could be different or a recognition that the measurement shouldn't be fair-value at all," said Scott Marcello, U.S. deputy leader of the financial services practice at KPMG.
But the FASB, though perhaps angering some hardliners with its action, made it clear that the concept of fair value is here to stay, Marcello said.
The board's final ruling did away with certain language from the draft proposal that some had interpreted as a far more liberal approach to asset valuation. In the process, PNC chief financial officer Richard Johnson said on his company's first-quarter earnings call, "what appeared to be on the table in terms of the ability to improve the marks was taken off the table." As a result, he said, the impact of the mark-to-market accounting changes on PNC was "de minimis."