A Two-Pronged Push To Aid Ailing Banks

By Binyamin Appelbaum and Carrie Johnson
Washington Post Staff Writers
Wednesday, October 1, 2008

Two federal agencies moved yesterday to ease the financial pressure on banks even as Congress continued to debate the wisdom of a broader intervention.

The Federal Deposit Insurance Corporation said it would ask Congress to extend the government's guarantee of bank deposits beyond the current limit of $100,000 on each standard account, hoping to convince queasy depositors that there is no need to pull money from troubled banks.

Meanwhile, securities regulators and accounting rule-makers granted banks greater power to decide the value of their investments, even if market data suggest that prices should be lower. That could allow some banks to report smaller losses, perhaps comforting investors.

The carefully calibrated moves are trial balloons from an administration under intense pressure. Regulators, convinced that financial firms' problems are becoming economic problems, are searching for ways to help the financial industry without further provoking an angry public -- or its elected representatives in Congress.

If successful, yesterday's moves could stanch the bleeding at commercial banks in two ways: limiting their losses as the value of their mortgage investments declines and as customers withdraw deposits.

But both proposals drew quick criticism as attempts to hide rather than solve the industry's problems. An increase in the deposit guarantee also could have the effect of sheltering banks from their own mistakes by making it easier to retain depositors. And the accounting proposal has been described by critics as a way to allow banks to conceal losses.

"These veiled attempts to return to older, flawed cost-accounting methods will do more harm than good by allowing financial services companies to obscure deterioration in their balance sheets and avoid charges necessary to ensure that their income statements reflects their true economic performance," Donn Vickrey of Gradient Analytics, a market research firm, wrote in a note to clients.

The events yesterday again highlighted the increased prominence of FDIC Chairman Sheila C. Bair, who has taken a lead role in the government's response as the financial crisis spreads from Wall Street to infect retail and commercial banks.

Bair in the past week has engineered deals to sell Washington Mutual to J.P. Morgan Chase and Wachovia to Citigroup. Now she is trying to forestall any additional fire sales. Washington Mutual and Wachovia, two of the nation's largest banks, were forced into the hands of federal regulators in part because reports of ill health led depositors to withdraw money the banks needed to survive.

Bair placed a call yesterday morning to Rep. Barney Frank (D-Mass.), chairman of the House Financial Services Committee, to tell him that she planned to send Congress a formal request for the insurance increase because of concern about bank runs. Congress would have to vote to change the law.

The cap has not been raised since 1980, while average balances have climbed. Small businesses, in particular, often keep large account balances. As a result, only 63 percent of bank deposits now fit under the FDIC's umbrella.

"Unfortunately, there is an increasing crisis of confidence that is feeding unnecessary fear in the marketplace," Bair said in a statement. "To address this crisis of confidence, I do believe that it would be helpful for the FDIC to have the temporary ability to raise deposit insurance limits."

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."

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