The Financial Accounting Standards Board (FASB) voted yesterday to let banks ignore market prices for assets if they judge the market is illiquid and that the most recent sales are being done at firesale prices by distressed sellers. There will also be changes to allow banks to book smaller losses on impaired assets that are available for sale, which could take extra pressure off many of the biggest banks in the US.
Traders put yesterday's dramatic rally by global equity markets down to the relaxation. In New York, the Dow Jones broke through the 8,000 barrier for the first time since 9 February, before closing up 2.8 per cent at 7,978.1. In London, the FTSE 100 rose 4.3 per cent to 4,125 – the first time it has closed above 4,000 for more than a month.
The FASB was acting under pressure from Congress, which said it may legislate if the board did not ease the rules.
The Centre for Investors and Entrepreneurs, which has been campaigning for a suspension of mark-to- market accounting, welcomed the move. Its director, John Berlau, said: "By itself, this change will not make the price of mortgage assets higher or lower. Rather, it will allow price discovery to occur. Mark-to-market distorted the market by forcing banks to take losses on mortgage assets even if the underlying loans were still performing."
The issue is at the root of the problems facing banks over trillions of dollars of mortgage-related assets, many of which have not traded for 18 months. As mortgage arrears have ballooned, investors have fled the market and those who want to buy them are not keen to pay top dollar. The few early trades, at low valuations, forced all the banks holding similar assets to write off more than half a trillion dollars, sending several large players to the point of insolvency.
Since then, banks have refused to accept dramatically lower prices, believing their losses will be less if they hold the assets until all the underlying mortgages have been paid back. The stalemate, though, has led to frozen credit markets.
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