Move to Ease 'Mark' Rule May Subvert Treasury Plan

By HEIDI N. MOORE A new accounting rule set to be approved this week will relax mark-to-market rules for banks sitting on billions of dollars in toxic assets, making it more attractive to keep the assets on their books. Yet those changes may undermine a larger U.S. Treasury plan to rid the banks of those same assets, bankers and accounting experts say. The Financial Accounting Standards Board is proposing significant changes to its mark-to-market rules, allowing banks to set their own values for certain hard-to-value troubled mortgages, corporate loans and consumer loans. The new proposal, called FAS 157-e, is scheduled for a vote this Thursday. Heard on the Street Accounting Rules Should Avoid Impairment 04/01/2009The change was meant to assist U.S. banks after bankers complained current mark-to-market accounting rules forced them to undervalue their assets, by setting prices at deeply discounted, fire-sale values. Once the new accounting rule takes effect, banks will have new incentive to keep the assets directly on their books, say bankers. That is because the rule states that banks can use their own judgment on asset values as long as there are no willing bidders to set a market price. "There is no clear definition of what a toxic asset is," said Christopher Hoeffel, president of the Commercial Mortgage Securities Association. "Some bankers are saying, 'I don't want to sell these assets, because the loan might still be good -- and if I hold it to maturity, I might get my money back.'" That seems to run counter to the Treasury plan, which could spend up to $1 trillion to remove impaired assets from banks' balance sheets. There is strong Wall Street support for Treasury's program, with some investors advocating a complete cleanup of assets via the Treasury program. "There is a disconnect there between the two plans," said analyst Robert Willens, who follows tax and accounting issues for the Willens Report. "Arguably, this new FASB rule will actually inhibit people from doing what the Treasury secretary would like them to do, which is sell the toxic assets. There is a little bit of the lack of coordination between the two concepts." If approved, FAS 157-e will give banks more leeway to determine what constitutes a "market." Write to Heidi N. Moore at heidi.moore@wsj.com