WASHINGTON — Regulators are planning to announce new guidance within the next three weeks designed to help bankers better account for illiquid assets on their balance sheets, federal agencies said Thursday.
But agency officials warned at a House hearing that the guidance is unlikely to be a silver bullet to the many complaints lodged against mark-to-market accounting, and denied that accounting rules exacerbated the crisis.
"Accounting did not cause this crisis," said James Kroeker, the acting chief accountant at the Securities and Exchange Commission. "Accounting will not end it. But it should not make it worse."
Robert Herz, the chairman of the Financial Accounting Standards Board, expressed exasperation with the way accounting rules have been applied and repeatedly argued that fair-value standards do not force banks to write down assets to market prices.
"This is part of the frustration on our part, because the fair-value measure has within it an ability to do cash-flow modeling rather than just take prices in the market that might have been fire sales," he said. "We've told people repeatedly that it's not a last trade model. But for some reason, that keeps happening."
The disconnect stems from "cultural and institutional aspects" of how banks apply accounting and from "a little bias in the auditing system to look for trades rather than the cash-flow modeling," Herz said.
Kroeker, Herz and Kevin Bailey, the deputy comptroller for regulatory policy at the Office of the Comptroller of the Currency, sat before lawmakers for more than three hours. But few details emerged on how the new guidance might help banks deal with their illiquid assets.
Herz said he thought the existing rules offered clarity, but "we're going to have to give them more examples" in the guidance, he said.
The hearing drew wide interest from lawmakers of both major parties. After months of wrangling over provisions of the Obama administration's efforts to heal the economy, the hearing offered a rare moment of bipartisanship as most lawmakers criticized the effects of mark-to-market accounting.
"Take the case of the Federal Home Loan Bank of Atlanta," said Rep. Paul Kanjorski, D-Pa., who chairs the subcommittee. "Last September, the bank estimated it would lose $44,000 in cash flows on three private-label mortgage-backed securities starting in about 15 years. The magic of mark-to-market accounting required this relatively minor shortfall to be treated as an other-than-temporary impairment loss of $87.3 million. I find that accounting result to be absurd."
The Federal Home Loan Bank System, which took $1.8 billion in OTTI charges last year, has emerged as a symbol of the perils of mark-to-market accounting. Facing mounting OTTI charges, the Federal Home Loan Bank of Seattle on Monday became the first bank in the system's 76-year history to exhaust its retained earnings, effectively "breaking the buck" and potentially forcing member institutions to write down the value of their stock.
Lawmakers said regulators have been slow to address accounting rules that have cost financial institutions billions.
"Regulators have had more than enough time to make determinations to help financial institutions," said Rep. Gary Ackerman, D-N.Y. "We simply cannot wait any longer for some substantive action to be taken to help institutions understand how to record illiquid assets."
Rep. Scott Garrett, R-N.J., said he is "deeply troubled at the lack of speed" in regulators' reforms.
"When a collapsing market and struggling financial institutions are in need of expedited and comprehensive guidance, FASB must be more nimble and responsive to these concerns," he said.
House Financial Services Committee Chairman Barney Frank said regulators should let him know now whether they believe any current laws discourage them from making needed changes.
"No agency, I hope, two months from now is going to tell us they would have liked to have more flexibility," the Massachusetts Democrat said.
Kanjorski held out the possibility of legislating changes to accounting rules if regulators did not act swiftly or strongly enough. But he stopped short of saying Congress would force an end to mark-to-market accounting.
"If we do away with this standard entirely, accounting will revert to the very kind of subjectivity and sleight of hand that made mark-to-market necessary in the first place," he said.
Across Capitol Hill, Treasury Secretary Timothy Geithner also was reluctant to support a suspension of the rules.
"My personal point of view is that you have to be very careful not to do things that would erode confidence in the people's ability to assess risk and exposure to a bank," he told the Senate Budget Committee.
The SEC's Kroeker said mark-to-market accounting makes the status of an institution more transparent for investors. But Kanjorski said that is less of a concern in the current market.
"I've been sympathetic to getting a more transparent system of accounting so it can protect investors," he said. "But I would make a comment particularly for the financial services field. We don't have any investors anymore."
