A Two-Pronged Push To Aid Ailing Banks

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Bush Implores Congress to Act to Rescue Markets

President Bush said Tuesday that the economic damage to the nation will be 'painful and lasting' if Congress fails to pass a $700 billion bailout bill.

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An FDIC spokesman said the agency was not supporting any particular number for a new cap, and it did not specify how long the increase should last. Those decisions will be left up to Congress. Leaders in both parties, including both presidential candidates, Sens. John McCain (R-Ariz.) and Barack Obama (D-Ill.), have called for a cap of $250,000. That higher limit already applies to retirement accounts.

Any increase in the ceiling would require an expansion of the FDIC's insurance fund. The fund is replenished by an assessment on the banking industry, not taxpayers, but higher assessments would limit the amount of money banks have available to make loans.

Some experts warned that $250,000 is an arbitrary number. William Isaac, a former FDIC chairman, said many small businesses would still have deposits in excess of that ceiling. Government data show that almost a quarter of bank deposits would remain uninsured.

Isaac said the government instead should emulate its recent guarantee of money-market mutual funds by announcing that it will guarantee all bank deposits for the duration of the financial crisis.

"Increasing FDIC insurance coverage to $250,000 is a serious mistake," Isaac said. "The government just last week said it would insure 100 percent of money-market accounts, and now they're going to toss a $250,000 bone to banks?"

Yesterday's second front was opened by the Securities and Exchange Commission, which, together with the Financial Accounting Standards Board, issued what it called a "clarification" to provisions that have come under fire from bank executives and some lawmakers for contributing to the credit crisis.

Under an accounting standard that took effect in November, businesses are required to employ "fair value" accounting, meaning that at regular intervals they must adjust the value of assets to reflect market prices even if they do not intend to sell those assets for a long time, perhaps until prices have recovered.

The standard, also known as "mark to market," has forced banks in recent months to take big losses as other banks sell assets at fire-sale prices, driving down values throughout the market. That in turn has sometimes required banks to raise money to meet regulatory requirements that they keep enough capital on hand to cover potential losses.

Lobbyists for the American Bankers Association and the Financial Services Roundtable urged the SEC in a meeting last week to suspend or relax the accounting provision. A similar advocacy effort continues on Capitol Hill, where lawmakers are redrafting bailout legislation.

Yesterday's move does not go as far as the industry would like. The three-page joint statement from the SEC and FASB just gives companies more leeway to assign their own values in cases where markets are "disorderly" or seized by liquidity problems. It also gives companies more room to insist that declines in the value of assets are only temporary, allowing them to defer even larger write-downs.

Regulators also reminded companies yesterday that in exchange for being able to use more estimates and judgment, the need to disclose their valuation methods to investors is all the more important. The SEC sent letters reminding firms of their obligations twice already this year, in March and September, after expressing concern that many financial institutions were using opaque measurements.

Banking groups cheered the changes, which they said had been growing in urgency because the third fiscal quarter for many companies ended yesterday.

"This is a significant first step and adds stability, confidence and liquidity within the capital markets," said Steve Bartlett, chief executive of the Financial Services Roundtable.

But trade groups representing audit firms and financial analysts warned against going further.

The Center for Audit Quality, a coalition of 800 accounting firms, pointed out in a letter to members of Congress yesterday that inflated valuations only made the savings-and-loan scandal of the 1980s all the more "devastating when the bubble finally burst."