As presented in a (publicly accessible) blockbuster Wall Street Journal article today, "Congress Helped Banks Defang Key Rule" the case is clear. The financial industry, eager for changes in accounting rules that would boost their balance sheets, lobbied Congress intensively. In a rare display of bipartisan amity, both Democrats and Republicans in turn applied intense pressure to Financial Accounting Standards Board, directing the regulatory body in charge of accounting rules to weaken so-called "mark-to-market" accounting.
In early April, the FASB acquiesced to Congress' clear directive, just in time for the banks to goose their first quarter earnings.
Journal reporters Susan Pulliam and Tom McGinty deserve a lot of credit for nailing the story -- it is as well documented a case of big-bucks lobbyists succeeding in getting the rules changed in favor of their clients as you will ever see.
In my past reporting on the mark to market issue I have tried to take seriously the arguments that are made about why some changes might have been necessary in how financial institutions are forced to value the securities they own. When markets go completely haywire, and those mortgage-backed securities on your books are impossible to sell, at any price, does that really mean for accounting purposes they should be valued at zero, thus forcing you into immediate insolvency? That can be disruptive! There are no thoroughly satisfactory answers to how to resolve this problem.
But Pulliam and McGinty let the cat out of the bag at the very end of the story, where they report something I haven't seen anywhere else.
Still, many saw the new rules as a watering down of standards. That triggered a backlash within FASB. At a meeting of a FASB advisory group in New York on April 28, three of its members threatened to resign in protest, concerned that FASB had jeopardized its credibility.
Lynn Turner, the SEC's former chief accountant and a former FASB member, was one of them. He says he doesn't think the banking industry will be satisfied until mark-to-market accounting is dismantled completely. "Despite efforts by FASB to give ground to the banks, enough is never enough," he says.
Three members threatened to resign in protest! Doesn't that tell us all we need to know?
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