Mark-to-Market Eased, But to What Effect?

Under pressure from banks and some members of Congress, the U.S. Financial Accounting Standards Board has relaxed a controversial rule that some analysts say contributed to last fall's economic meltdown. The big question now is, will undoing it help set things right again?

The board agreed on Thursday to loosen the so-called Mark-to-Market Rule, which requires banks to use current market prices when valuing the assets they hold. The rule is intended to provide for transparency in accounting by requiring banks to list assets such as real estate securities at their current market prices, rather than what the bank expects they would command at maturity.

Loosening the rule gives banks more leeway to list real estate assets on their books at values closer to what the banks think they are actually worth, rather than what they would command in a "fire sale" in the current market. Doing so helps allows them to strengthen their balance sheets, and puts them in a stronger position to both borrow and lend.

Some economists believe that when real estate values fell last fall, the mark-to-market rule exacerbated the financial crisis by making it more difficult for banks to lend, since they had fewer assets to back their loans.

Investors welcomed the news, and financial stocks rose in response. However, some observers criticized the move, saying it allows banks to hide the true value of toxic assets.

"This certainly helps banks cosmetically. It will increase capital levels quite a bit. Yet I'm finding the investors I speak to are mostly disappointed because it doesn't change the reality of the banks," Robert Willens, an analyst specializing in tax and accounting issues, told Reuters News Service. "Most of these assets are still losing value at a rapid clip. "The fact that banks will not have to reflect that loss from an accounting point of view doesn't change the reality."

Ironically, the rule change could undermine the government's new Troubled Assets Relief Program (TARP), which is intended to subsidize a market in which banks could sell off troubled assets. The concern is that relaxing the mark-to-market rule removes the incentives banks have to get depressed assets off their books, since they can now list them at greater value. However, some analysts say the rule might have the opposite effect, by allowing banks to offer such assets for sale at prices closer to what they believe their true value is.