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Last week the fiercely independent Financial Accounting Standards Board agreed to alter a portion of the rules under extreme pressure from the US Congress. The MTM standards have forced many financial institutions to overstate losses on Trillions of US Dollars worth of assets that has intensified the global financial crisis. William M. Isaac, a former chairman of the Federal Deposit Insurance Corp., told a House Financial Services subcommittee hearing on March 12 that “MTM accounting has destroyed well over US$500B of capital in our financial system.

Moreover, since capital can be leveraged about 10 times in making loans, the rules have “destroyed over US$5Tof lending capacity,” said Isaac, now a consultant with the Secura Group of LECG Corp. The problem with Mark-to-Market accounting is that it officially has presumed there’s a functioning market in whatever asset is being valued, and that means a deal between a willing buyer and seller that is not being forced to sell. Actually, no such market exists for many mortgage-backed securities.

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A US House of Representatives panel got a pledge late last Thursday night from the Robert Hertz, Chairman of the independent Financial Accounting Standards Board to issue guidelines within three weeks that will ease the Mark to Market (MTM) rules that force US banks to value assets at current prices. The head of the US House panel, Rep. Paul Kanjorski (D-Pa.), held out the threat of legislation to pressure the standard setting board and the Securities and Exchange Commission to take steps that would give relief to battered US banks and US insurance companies. The current MTM rule has forced US banks to take steep write-downs on some financial assets, especially securities linked to mortgages, even as they have suffered from the housing slump. As the financial crisis grinds on and world banks large and small founder and fail, the banking industry has pushed for the accounting relief.

Popularity: 6% [?]