Congress will force regulators to relax the much-criticised mark-to-market accounting rule if they fail to take action themselves, Barney Frank, the chairman of the House financial services committee, on Thursday warned.
Mr Frank told representatives of the Financial Accounting Standards Board and the Securities and Exchange Commission that they had to act quickly to revise the rule. “We do have to have you move now,” said Mr Frank. “You are the FASB. In this one you can’t be the slow-B.”
Mark-to-market, which compels banks to value assets at current market prices, is blamed by some for exacerbating the financial crisis because the illiquid market for certain instruments such as mortgage-backed securities has forced financial institutions to write down the value of their holdings.
“It fails to reflect the economic reality,” said Paul Kanjorski, Democratic head of the House financial services capital markets sub-committee. “If the regulators do not act now to improve the standards, then the Congress will have no other option than to act itself.”
Under tough questioning from Mr Frank’s committee, the SEC and FASB agreed to produce new guidance on the subject within three weeks.
However, Robert Herz, FASB chairman, said institutions could already apply a cashflow value to certain hard-to-value assets rather than using the last transaction as a benchmark.
David Larsen, an accountant at Duff & Phelps, said guidance from the FASB was needed to encourage banks and their auditors to “get away from that bias [towards the last transaction]” as well as providing new guidelines on the way mortgage-backed securities were treated.
Jamie Dimon, chief executive of JPMorgan Chase, said on Wednesday that although he “liked” the mark-to-market accounting rule, it had its limits. “We have taken it to a ridiculous point,” he told a Chamber of Commerce conference in Washington. “I think it’s wrong to create all that volatility.”
But Chris Dodd, Democratic chairman of the influential Senate banking committee, told the conference that Congress should resist calls to intervene in the accounting system to alter the mark-to-market rule, which should be left to accounting bodies.
“To get the Congress to decide that issue is very very dangerous … It will come back to bite you in ways you can’t imagine,” he said.
Tim Geithner, Treasury secretary, said in a hearing with the Senate budget committee on Thursday that he had reservations about suspending the mark-to-market rule.