Wall St. Points to Disclosure As Issue
Tuesday, September 23, 2008
Wall Street executives and lobbyists say they know what helped push the nation's largest financial institutions over the edge in recent months. The culprit, they say, is accounting.
The banks are making their case now in the hopes they can persuade securities regulators and lawmakers to temporarily suspend or roll back an accounting measure that took effect late last year as the credit crisis bloomed.
At issue is a provision that requires companies to disclose more information about the value of their assets, including how much they could fetch on the open market. The accounting standard, known as fair value or mark to market, has been cited as a contributing factor in the collapses of American International Group, Freddie Mac and Lehman Brothers.
There's only one problem, according to regulators and accounting analysts: The provision does not impose new duties on companies but merely exposes bum mortgage bets, making it a convenient scapegoat during market unrest.
"It's easy to blame accounting because it doesn't fight back," said Jack Ciesielski, author of the Analyst's Accounting Observer, a financial newsletter. "Now that there's somebody out there putting some light on the financials, it's shoot the messenger."
Lynn E. Turner, a former SEC chief accountant, said he remembered fielding questions about the accounting provision six months ago from lawmakers on Capitol Hill.
"What the banks are telling everyone is that the accounting has caused the problem," Turner said. "The only thing fair-value accounting did is force you to tell investors you made a bunch of very bad loans."
The standard, which took hold last November, did not apply to any major new classes of investments. But it did require companies to provide investors with more information about how they estimate the value of assets, such as credit card receivables and mortgage loans. Each quarter, companies must affix a price tag to those securities and report it in their financial statements, even if they do not plan to unload them right away.
Under normal circumstances, finding a buyer for a particular asset or estimating its price on the open market is rarely a challenge. In an unusually tight credit environment, however, estimating the fair value of assets grew challenging -- especially as trading partners backed away from risks associated with opaque investments such as tranches of mortgage-backed loans.
In many cases, the price tags dipped to artificially low levels, forcing banks and insurers to take large write-downs and raise capital to shore up their balance sheets, even when they did not intend to sell the assets anytime soon. Critics say the practice launched a desperate cycle from which some companies did not recover.
Supporters of fair-value accounting acknowledge that it can lead to low valuations but say it remains the best way to share information with investors.
"It's intended to be more or less for orderly markets," said Dennis R. Beresford, an accounting professor at the University of Georgia. "But we don't have orderly markets these days. It's not so much that mark to market has people complaining, but marking to a particular market. Today it's more kind of fire-sale prices."