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FASB relaxes accounting rules for banks on assets

FASB relaxes accounting rules on asset values; could help banks but
may undercut federal plan
WASHINGTON (AP) -- The board that sets U.S. accounting standards on Thursday gave
companies more leeway in valuing assets and reporting losses. The changes should help
boost battered banks' balance sheets and financial stocks rallied on Wall Street, but the
rules may undercut a new financial rescue program.
Some experts and industry officials said the move will help resuscitate banks, allowing
them to increase earnings and carry less capital as a buffer against potential losses. That
should lead to more lending and help get the economy pumping again.
But others said the changes by the Financial Accounting Standards Board could
undermine a crucial new rescue program mounted by the Obama administration, in which
the government is joining with private investors to buy from banks hundreds of billions
of dollars in toxic assets -- especially the securities tied to high-risk subprime mortgages
at the heart of the financial crisis.
In the short run, banks would benefit by raising the value of the assets. But higher values
could drive away prospective private investors -- who don't like to overpay, even though
the government will absorb most of the risk.
"I do think the timing is terrible," said Sue Allon, the CEO of Allonhill in Denver, who
works with hedge funds and investment banks to price assets.
Ideally it would have been better for the government-backed program to have been
started up and producing "some lift" to prices before FASB made its move, Allon said.
Joshua Shapiro, chief U.S. economist at MFR Inc., was more blunt, saying the FASB
decision "allows financial institutions to use fictional valuations on many of their toxic
assets" and further obscures their "true position."
But Marc Chandler, an analyst at investment firm Brown Brothers Harriman, said the
move was "consistent with easing the strain on the banks."
"The net impact could help boost bank earnings, reduce the need for capital injections
(into banks by the government) and may help encourage participation" by private
investors in government programs for selling toxic assets, he said.
The FASB board's action helped fuel a buying surge on Wall Street, lifting the Dow Jones
industrial average about 300 points in a rally led by financial company stocks. But stocks
finished below their highs of the day, and as the initial ebullience sparked by the
accounting move wanes, investors may be less optimistic over its long-term implications.

At one point the Dow indicator broke through the 8,000 level for the first time since early
February. It finished more than 216 points higher at 7,978.08.
The FASB issued new guidelines under the so-called mark-to-market accounting rules,
which require companies to value assets at prices reflecting current market conditions.
The changes, which apply to the second quarter that began this month, will allow the
assets to be valued at what the banks project they might sell for in the future, rather than
in the current, distressed environment.
Still, investor advocates and other critics assailed the FASB, which took the action -- with
some dissension -- at a public meeting of its five-member board at its headquarters in
Norwalk, Conn. The critics said the board had sacrificed its independence and buckled to
pressure from lawmakers carrying water for banking industry interests.
The FASB received hundreds of comment letters opposing the moves in the two weeks
since it proposed them from mutual funds, accounting firms and others contending they
would damage honest financial reckoning by masking the deficiencies and risks lurking
within the system.
A House panel last month wrung a pledge from FASB Chairman Robert Herz to try to
issue guidelines in three weeks that would relax the mark-to-market rules to bring relief
to the nation's banks in the financial emergency. The head of the House Financial
Services subcommittee, Rep. Paul Kanjorski, D-Pa., had held out the threat of legislation
to pressure the standard-setting board to take the steps.
The normally low-profile organization was put on the defensive. "These are extraordinary
times and the FASB has responded swiftly to the critical needs of the capital markets,"
Neal McGarity, a FASB spokesman, told reporters after the votes.
He said the changes "were already in our plans and thinking well ahead of" congressional
calls for action.
An estimated $2 trillion in soured assets is weighing on banks' balance sheets. The markto-market rules have forced banks to take steep write-downs on subprime mortgage
securities and other toxic assets, as the industry has reeled from the housing market
slump and banks have foundered and failed.
The new guidelines remove the presumption that if there isn't a current active market for
assets, they must automatically be considered distressed. They also will allow banks to
avoid reporting some losses on securities by splitting them among factors like anemic
markets or fluctuating interest rates that won't have to be counted toward net income or
loss.
Two of the five FASB board members, Thomas Linsmeier and Marc Siegel, voted against
the change in reporting of such impaired assets. Siegel said "the pressure keeps on
coming back to us." They argued it was the sort of decision federal bank regulators

should make, because it could affect how much capital banks would need to hold, and
that the FASB had been pressured by Congress to take it.
"This is a huge mulligan for banks with junky securities," said Jack Ciesielski, an
accounting expert who writes the financial newsletter The Analyst's Accounting
Observer.
A key concern is the impact of the changes on the government's new program in which it
is joining with private investors to buy up about $500 billion in toxic assets from banks.
With the banks now able to keep assets impaired by market factors from affecting their
bottom line, they'll be more likely to hold onto them. "Buyers will be willing to buy
them," possibly at less than 30 or 40 cents on the dollar, Allon said. Some investors prefer
a mix of higher- and lower-quality assets, she noted.
If the assets remain on banks' books, they may continue to be reluctant to lend as they fret
over the assets' future performance. That could work against the purpose of the
government's program: to break the logjam in lending and get the economy pumping
again, which would hurt consumers and small businesses caught in the credit squeeze.

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