SEC rejects bid to suspend mark-to-market rules

Source: SF Gate

Federal regulators have rejected a banking industry push to suspend accounting rules that force banks to value assets on their balance sheets at current market prices even if they plan to hold them for years.

The Securities and Exchange Commission issued a report to Congress on Tuesday that recommends maintaining so-called mark-to-market rules. Proponents of the rules argued that suspending them would weaken transparency in companies' financial statements, hurting investors and the capital markets. Critics said the regulations mandate unnecessary write-downs that don't reflect the true value of soured, mortgage-linked assets and the prices they may fetch in the future.

The SEC's study of the practice, also known as fair value accounting, was mandated by Congress as part of the $700 billion financial bailout package passed in October. The law also affirmed the SEC's authority to suspend mark-to-market accounting - a change won by the industry's Republican allies in Congress.

The 259-page report also concluded that accounting rules "did not appear to play a meaningful role" in the 25 bank failures that have occurred this year or the tumult at collapsed investment banks.



Read more: http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2008/12/31/BUAL151A0O.DTL

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Now this is confusing, why is the SEC doing this? It is definitely the right thing to do so why is the SEC doing it? Nowadays the SEC always follows the wrong course by throwing out all the rules in order to benefit corporate profits.

Seems as if a lame duck Cox is a good thing.

Freeper heads are going to explode when they get wind of this.

AREN'T they overturning years of accounting practices and allowing these crooks to put some ficticious 'amount' on their books to keep track of assets?

Weren't they just asking to be allowed to legally 'cook the books'?

When I was in Accounting School, any assets were to be kept at the "Lower of cost or market" i.e. at the cost the assets was purchased at OR what it could be sold for (or Bought) for today IF such cost was LOWER then what was paid for it.

Now under Reagan, the Banks started to anticipate "profits" and would value up assets to what they could sell them for (among other accounting tricks to recognize profits even while they still held the property). Such ricks were permitted by the SEC, but over the last few years have come back to haunt the whole financial industry. The System adopted under Reagan worked as long as housing prices were going up, but given the recent decline in real estate values it became unsustainable (Which is why the "Lower of Cost or Market" had been the rules for decades). Given this there is no way the SEC would endorse any other accounting rule then "Mark to Market" rule.

Now, as part of the Bailout package, Congress added that the SEC will review Accounting Rules and report back to Congress. That is what the SEC did here, but given the above there was no way the SEC would adopt any rule other then "Mark to market". The problem is the Banks oppose "Mark to Market" for the banks have to many assets tied in with house values, and given the decline in house prices those assets will also have to be devalued. The devaluation can be so severe that is will show almost all of the banks in the US are insolvent (i,e, owe more then they own). Thus the Resistance to "mark to Market" rules and such Resistance will last till a good many more banks bit the dust.

has been the rule changes during the past couple of years.

The wealth effect is very real. Repubs don't seem to understand consequences that take more than 3 months to unwind. Although the change in the "uptick rule" did cause the markets to immediately become far more volitile.

As Greespan admitted, there were doctrines that made things look good but only in a rising market. In a down market, the opposite happens, creating panic buying and selling.

But none of this can change until a new administration takes over because it's better to collapse the economy, than to admit you had it wrong.

it reduces the transparency of financial statements. I would guess that the SEC sees that as a priority.

If it were repealed, assets on financial statements might be worth much less at current prices. This could lead to meltdowns if a company needed to raise cash quickly.

If they COULD suspend the rule, could it help homeowners?
For example, if the value of an asset (a house/a mortgage) plummets on paper by the bank, would it give consumers an edge in refinancing or restructuring their mortgage?
Would this -- could this -- affect securities?

And... how many more hours for this Administration, and how much more damage can they do between now and then??

What the bank has on its books for the value of your home has nothing to do with what you owe on your mortgage balance. Your mortgage is just a loan to them which is becoming under-collateralized by the dropping market price of your home.

I understand that... but if it's less on paper, why couldn't the banks therefore allow more room to modify loans?
You don't really have to answer and this isn't a personal issue. I've just gotten very disillusioned by this bailout and the apparent inability/unwillingness for the banks to work with homeowners so they can get on their feet.
The SEC may have done a good thing, but that seems somewhat unlikely under this Administration.

Once they give the homeowner the money and set up the loan, they arrange to have the mortgage serviced by an outside contract who collects the money from the homeowner. Then the bank took the mortgage combined it with hundreds of other mortgages chopped them up into thousands of little pieces and combined them together with hundreds of pieces of other loans and sold the combination document to various hedge funds and other banks.

The bank does not care about the homeowner any longer since it no longer had ownership of the mortgage.

This is why so many homeowners cannot renegotiate their mortgage. No one company owns the entire mortgage.