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Statement on the Expected Vote to Relax Mark-to-Market, or “Fair Value,” Accounting Mandates

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Statement on the Expected Vote to Relax Mark-to-Market, or “Fair Value,” Accounting Mandates

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Washington,
D.C., April 2, 2009—The events leading to the Dow's climbing over 8000
today can be properly called the Mark-to-Market Relief Rally. More than any
expected action of the bureaucrats and politicians at the G20, the decision
expected today of the Financial Accounting Standards Board (FASB) to
relax strict application of mark-to-market accounting mandates, urged by
members of Congress of both parties, it what's giving investors something to
cheer for.

In this era that supposedly
signifies the return of big government, it is heartening that on this issue,
Republicans and Democrats worked together to push for this common-sense
free-market reform that will do much to get our economy going and could save
taxpayers billions in avoiding the need for bailouts.

In CEI’s recently released “Bipartisan Agenda for Economic Liberalization,”
we advise Congress to “make accounting regulators accountable” and to “require
regulators to suspend mark-to-market accounting mandates such as Financial
Accounting Standard 157 until better guidance is developed for illiquid
markets.” Thanks to members of Congress such as Paul Kanjorski, Ed Perlmutter,
and Peter DeFazio on the Democratic side and Spencer Bachus, Scott Garrett, and
Michelle Bachmann on the GOP side pushing FASB to reform the rules,
a significant step has been taken toward this objective being achieved.

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, based on the
last fire sale price of similar assets. Respected banking analyst Richard Bove pointed out that because of mark-to-market, Bank
of New York Mellon had to value its portfolio of commercial
mortgage-backed securities with a 1 percent default rate as if it had a 25 percent
default rate. This resulted in a $70 billion loss of liquidity to the
financial system from this bank alone.

With the expected change to mark-to-market today,
whether banks hold or sell toxic assets should not be a concern. Either way,
this rule change will help keep toxic assets from weighing down banks’ “regulatory
capital” and unnecessarily tightening the lending they do. And it will save
taxpayers billions by letting the market simply value the assets at prices
similar to what government programs such as Treasury Secretary Tim Geithner's
Public Private Investment Partnership seek to buy them for.

The concerns about FASB’s independence is also misplaced.
Rather, the concern should be that this quasi-private board,
whose edicts are embedded in federal regulations and have a profound
affect on the economy, is unaccountable to the American people. Many
accountants, economists, and other experts have long criticized mark-to-market
for being pro-cyclical, resulting in assets being valued too high during a
boom, as when Enron utilized mark-to-market to manipulate its earnings, and
causing a downward spiral during a bust. Yet FASB refused to take those
concerns under consideration until Congress pushed it to.

Saying that only accountants can determine accounting policy
in federal regulation is like saying that only members of the military can
make policy regarding war. Today's change in mark-to-market rules is a good
first step toward restoring the accountability of big accounting bodies like
FASB and the Public Company Accounting Oversight Board.

CEI is a non-profit, non-partisan
public policy group dedicated to the principles of free enterprise and limited
government.  For more information about
CEI, please visit our website at www.cei.org.