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Banks and allies want 'immediate' fix to accounting rules

The big guns came out blazing today in the battle over "mark-to-market" accounting.

In a letter to the leadership of the House Financial Services Committee -- which will hold a hearing Thursday on mark-to-market rules -- 31 industry groups and financial institutions called for "immediate action" to halt the "spiral of accounting-driven financial losses."

In other words, end mark-to-market as it is now broadly applied to the banking industry.

The letter’s signatories included the American Bankers Assn., the Independent Community Bankers of America, the Mortgage Bankers Assn. and the U.S. Chamber of Commerce.

Thursday's hearing will be chaired by Rep. Paul Kanjorski (D-Pa.), who heads the Financial Services Committee's capital markets subcommittee.

For the last year, the banking industry has asserted that mark-to-market, or fair-value, accounting has worsened the financial crisis by forcing banks to drastically write-down the value of many mortgage securities they hold.

The Financial Accounting Standards Board’s rules basically require financial institutions to value securities on their books at current market prices, even if the securities don't mature for many years.

Bankers say that has unfairly ravaged their balance sheets because, they say, market values of mortgage-related securities have been unrealistically depressed, reflecting the massive uncertainty over the housing market. As banks’ balance sheets have deteriorated so has their ability to lend, they say.

The groups writing today to Financial Services Committee Chairman Rep. Barney Frank (D-Mass.) and to ranking Republican Rep. Spencer Bachus (R-Ala.) demanded that Congress "correct the unintended consequences" of market-to-market accounting.

From the letter:

"Let us be clear, real economic losses should be recognized and are necessary for orderly markets. However, the recognition of losses that do not have a basis in economic reality is unsustainable in any environment. Appropriate changes in mark-to-market accounting should not wait until mid-year or year-end. This will only allow the spiral of accounting-driven financial losses to continue."

Investor groups and others that oppose tinkering with mark-to-market rules fear banks would choose to value mortgage securities at unrealistically optimistic levels, misrepresenting the quality of their balance sheets.

The witness list for the hearing Thursday hasn’t yet been posted. I’ll put it on the blog as soon as I see it.

As I noted Friday, two congressmen last week introduced a bill to create a new federal board to review the "application" of accounting principles dictated by the FASB.

-- Tom Petruno

Photo: Rep. Paul Kanjorski (D-Pa.). Credit: Haraz N. Ghanbari / Associated Press

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