Vote Set For April 2 On Proposed Changes To Relax Mark-to-Market Accounting
Some blame Wall Street. Others fault borrowers who overextended themselves. And some say the lead culprit behind the nation’s financial crisis is an accounting rule known as the Financial Accounting Standards Board’s Rule 157, or FAS 157.
The purpose of FAS 157 is to give companies guidance on how to come up with market, or fair, values, for investments. This includes hard-to-value and exotic investments like collateralized debt obligations (CDOs) and other subprime-related debt. According to FAS 157, the assets must be valued at current market prices.
And therein is the problem. In some cases, no market exists for these investments. Even without a market, companies must still assign a value to their assets accordingly. Sometimes that means marking the value down to fire-sale prices.
Critics of FAS 157 say the rule is why investment banks have been forced to take billions and billions of dollars in write downs on losses related to CDOs and other “untouchable” investments.
Proponents say FAS 157 brings more transparency to the market itself, strengthening the risk management practices of investment banks and publicly traded companies and giving investors clarity about the worth of their investments.
Now the Financial Accounting Standards Board is preparing to vote on an overhaul of mark-to-market accounting rules. Under apparent pressure from lawmakers and financial banks, the board is proposing changes that will allow companies to use “significant judgment” when it comes to assigning value to their assets. In addition, the proposed changes will let companies reduce the amount of write-downs they must take on illiquid investments.
In other words, companies will be able to handpick the values most appealing to them and put those that create further turmoil to their balance sheets on the backburner.
As for investors, FAS 157’s proposed revisions not only create inconsistencies in valuations, but also will likely weaken an already waning confidence in Wall Street even further.
A final vote on FAS 157 revisions is scheduled for April 2.
Our affiliation of lawyers is actively involved in advising individual and institutional investors in evaluating their legal options when confronted with subprime and other mortgage-related investment losses.
