The Financial Accounting Standards Board (FASB) was hauled before Congressional hearings and members of both parties expressed concern that FAS 157 was exacerbating the crisis by causing banks to take huge paper losses and tighten lending unnecessarily. Sensing the threat of legislation, FASB announced a relaxation of the rule, an action that sent the Dow Jones Industrial Average soaring that day to above 8,000 for the first time in months. This simple change to accounting rules led to a stabilization of the economy that billions in bailouts had failed to achieve.
But now that the legislative focus on accounting rules has faded, FASB is trying to push through an expanded mark-to-market rule that would cover virtually all bank loans. Markto- market mandates have generated questions about their accuracy and their economic impact. They exaggerate losses by forcing financial institutions to write down performing loans based on another institution’s fire sale even if the market for such loans is highly illiquid and the financial institution in question has no plans to sell the loans.