ABA Letter To Paulson Says SEC Should Take Immediate Action On Fair Value
Nov. 25, 2008
FEI Summary

On Nov. 25, 2008, the American Bankers Association sent a letter to the U.S. Treasury Secretary Henry M. Paulson, asking that immediate action be taken by the U.S. Securities and Exchange Commission to combat the procyclical effects of mark-to-market accounting. (See: ABA Letter To Treasury.) The letter notes Paulson acknowledged mark-to-market accounting has a procyclical effect in a speech he made on November 20.  NOTE: Paulson said in a speech at The Reagan Libary on November 20: "We must address those aspects of our system that reinforce rather than counterbalance cycles; regulators and ratings agencies often take actions after a problem emerges that exacerbates the cycle. For example, mark-to-market accounting is clearly pro-cyclical. Yet I know of no better accounting method, and welcome the steps to review and modify its implementation during severe market stress."

Specifically, ABA's letter to Paulson, signed by ABA President Edward Yingling, states: “ABA strongly believes that immediate action is needed to avoid further hits to the capital of our financial institutions.” Noting that, “In a few weeks banks will be required to prepare their year-end financial statements,” and “[w]ith market prices continuing to fall well below the actual performance of bank assets, delay in addressing the failures of the mark-to-market mechanisms in fair value reporting will undo much of the work of Treasury’s Capital Purchase Program.”

“While the government makes billions of dollars available to increase capital, other policies simultaneously are needlessly, and wrongly, erasing billions of dollars of bank capital. This should not be allowed to happen,” states ABA.

Noting that “the consequences of these procyclical accounting standards are grave,” ABA calls for immediate action in the short term – which ABA stresses needs to be effective prior to year-end 2008. ABA says its recommendations “do not require a wholesale re-working of mark-to-market, but rather are clarifications that the SEC can and should make now.”

The short term actions which the ABA recommends the SEC take include:

·         Other Than Temporary Impairment (OTTI): The accounting rules for OTTI should be based on credit impairment (rather than impairment in ‘fair value’ as determined under FAS 157)

·         Fair value definition: The definition of fair value should be based on willing buyer/willing seller rather than exit price, and

·         Mergers and acquisitions: The implementation date for the new business combinations rules [FAS 141R], which are controversial and are based on fair value, should be delayed.

In addition to addressing the letter to Paulson, ABA included as cc’s on the letter the Chairmen of the SEC, Federal Reserve System, and Federal Reserve Bank of New York, as well as the Chairmen and Ranking Members of the House Financial Services Committee and the Senate Banking Committee.

Prepared by Edith Orenstein, Director, Technical Policy Analysis, Financial Executives International (FEI). This summary does not represent FEI opinion unless specifically noted above.