US suspends mark-to-market rules on bank assets

Stephen Foley
Friday 03 April 2009 00:00
Comments

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.

Register for free to continue reading

Registration is a free and easy way to support our truly independent journalism

By registering, you will also enjoy limited access to Premium articles, exclusive newsletters, commenting, and virtual events with our leading journalists

Please enter a valid email
Please enter a valid email
Must be at least 6 characters, include an upper and lower case character and a number
Must be at least 6 characters, include an upper and lower case character and a number
Must be at least 6 characters, include an upper and lower case character and a number
Please enter your first name
Special characters aren’t allowed
Please enter a name between 1 and 40 characters
Please enter your last name
Special characters aren’t allowed
Please enter a name between 1 and 40 characters
You must be over 18 years old to register
You must be over 18 years old to register
Opt-out-policy
You can opt-out at any time by signing in to your account to manage your preferences. Each email has a link to unsubscribe.

By clicking ‘Create my account’ you confirm that your data has been entered correctly and you have read and agree to our Terms of use, Cookie policy and Privacy notice.

This site is protected by reCAPTCHA and the Google Privacy policy and Terms of service apply.

Already have an account? sign in

By clicking ‘Register’ you confirm that your data has been entered correctly and you have read and agree to our Terms of use, Cookie policy and Privacy notice.

This site is protected by reCAPTCHA and the Google Privacy policy and Terms of service apply.

Register for free to continue reading

Registration is a free and easy way to support our truly independent journalism

By registering, you will also enjoy limited access to Premium articles, exclusive newsletters, commenting, and virtual events with our leading journalists

Already have an account? sign in

By clicking ‘Register’ you confirm that your data has been entered correctly and you have read and agree to our Terms of use, Cookie policy and Privacy notice.

This site is protected by reCAPTCHA and the Google Privacy policy and Terms of service apply.

Join our new commenting forum

Join thought-provoking conversations, follow other Independent readers and see their replies

Comments

Thank you for registering

Please refresh the page or navigate to another page on the site to be automatically logged inPlease refresh your browser to be logged in