U.S. lawmakers pressured the top U.S. accounting rulemaker for new guidance on mark-to-market accounting within three weeks or face legislation to change the rule that has forced banks to record billions of dollars in asset writedowns.
Financial Accounting Standards Board Chairman Robert Herz, under a barrage of questions, initially committed to the three-week timetable but then said he would have to consult with other board members.
I will take back a very clear message from today, Herz told the U.S. House of Representatives capital markets subcommittee. We'll do everything that we can.
The Securities and Exchange Commission's acting chief accountant, James Kroeker, told lawmakers we can absolutely work with the FASB within that timeframe.
The accounting rule, which requires assets to be valued at current market prices, is defended by investor advocates but the banking industry has pleaded for a suspension or modification of the rule.
Some banks and lawmakers contend that the accounting rule is destroying banks balance sheets because banks have to write down their assets to fire sale prices when they don't intend to sell the assets right away.
FASB was created to be an independent body and sheltered from political whims. However, lawmakers have been pressuring the accounting standard setter and the SEC, which enforces accounting rules, to provide banks with some relief.
CONGRESS MAY STEP IN
Fed up with the slow pace of accounting rulemaking, lawmakers said Congress would take action if the SEC and FASB failed to act quickly.
If the regulators and standard setters do not act now to improve the standards, then the Congress will have no other option than to act itself, said Paul Kanjorski, the chairman of the subcommittee.
Kanjorski, a Democrat from Pennsylvania, said there were three bills on mark-to-market pending in Congress. I guarantee you that one of those pieces of legislation is going to become law before early April.
Spencer Bachus, the top Republican on the full Financial Services Committee, said FASB and the SEC have not taken meaningful action to address the negative effects of the accounting rule.
Such action is long overdue, Bachus from Alabama said at the hearing. If FASB and the SEC refuse to use their authority to provide useful and timely guidance, this Congress may have no choice but to act in their place.
Barney Frank, the influential chairman of the Financial Services Committee, told the SEC and FASB that the consequences of a writedown should not be identical in different economic situations. We're going to have to have some movement, said the Massachusetts Democrat.
Policymakers, rulemakers and investors agree improvements could be made, but differ on how to do that.
Some want a system in place to split the losses or writedowns into credit and liquidity losses. Credit losses occur when a borrower no longer has the ability to repay a loan and requires a lender to immediately recognize the loss.
Liquidity losses are potential losses and there is an expectation that a borrower will still be able to repay the loan. Those losses are not recognized until the asset is sold.
Currently, writedowns in assets such as mortgage-backed securities are recorded as credit losses, which some characterize as misleading since some of the loans within the mortgage-backed security are still performing.
Representative Michael Capuano, a Democrat from Massachusetts, told the SEC and FASB to stop dithering and get it done. You know it's necessary. Don't make us tell you what to do.
(Reporting by Rachelle Younglai, Karey Wutkowski; Editing by Tim Dobbyn)