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Kanjorski Says Regulators Must Change Fair-Value Rule (Update2)

By Ian Katz and Jesse Westbrook

March 12 (Bloomberg) -- U.S. Representative Paul Kanjorski said regulators must act “quickly” to give companies more leeway in applying the fair-value accounting rule that banks blame for exacerbating the financial crisis.

“If the regulators and standard setters do not act now to improve the standards, then the Congress will have no other option than to act itself,” Kanjorski, the Pennsylvania Democrat who leads a House Financial Services capital markets subcommittee, said at a hearing today. Fair-value, which requires companies to mark assets to reflect market prices, has “produced numerous unintended consequences,” he said.

Lawmakers pressed Financial Accounting Standards Board Chairman Robert Herz and James Kroeker, the Securities and Exchange Commission’s chief accountant, to release improvements to the rule as soon as possible. Herz said he would try to have a proposal ready within three weeks.

Fair-value, also known as mark-to-market accounting, requires companies to set a value for securities every quarter to market prices. Citigroup Inc. and other companies argue the rule doesn’t work when trading has dried up because banks must mark assets at fire-sale prices. Investor groups and the accounting industry say the rule forces companies to reveal their true financial health to shareholders.

“We do have to have you move now,” House Financial Services Committee Chairman Barney Frank said at the hearing. “I do not think we’ve had enough flexibility.”

Kanjorski said he isn’t advocating suspending the rule, because such a move would bring back “the very kind of subjectivity and sleight of hand that made mark-to-market necessary in the first place.”

‘Quality and Transparency’

Eliminating fair-value “would diminish the quality and transparency of reporting, and could adversely affect investors’ confidence in the markets,” Herz said. The rule “can help to more promptly reveal underlying problems at financial institutions.”

Guidance being prepared by Norwalk, Connecticut-based FASB will encourage companies and auditors to use their own judgments in valuing assets, Herz said.

“That had been one of the frustrating issues,” he said. “The standard tells you not to look to distressed sales or forced liquidations. At some point we are just going to have to say for certain situations do not use a value. Use cash-flow predictions.”

Kroeker, the SEC’s acting chief accountant, said his agency supports FASB’s efforts to give companies additional guidance on valuing illiquid securities.

“Interruptions to financial stability caused by real economic factors should not lure us into suspending the transparency” that investors need, Kroeker said.

‘Inappropriate’

Kevin Bailey, deputy comptroller of the Office of the Comptroller of the Currency, said it would be “inappropriate” to suspend fair-value. Banking agencies “should continue to consider the critical need for risk sensitivity” related to capital requirements, he said.

Cynthia Fornelli, executive director of the Center for Audit Quality, an accounting industry group, said regulators could have a role in addressing fair-value.

“Regulators need to know the current values of loans and securities in order to make rational policy decisions,” Fornelli said in prepared testimony. “Whether or how those values affect capital requirements, and whether they should result in an institution running afoul of capital requirements, is a decision to be made by regulators.”

SEC Chairman Mary Schapiro, testifying before a House appropriations subcommittee yesterday, said FASB plans to release its guidelines in the second quarter to help banks comply with the mark-to-market rule when assets aren’t selling.

“It is not our intention that these assets be written down to zero,” Schapiro said. She added that the SEC, which oversees the FASB, has no plans to put a moratorium on mark-to-market accounting.