Will Mark to Market Changes Bring Brighter Days for Financials?

The Financial Accounting Standards Board has made a very important change in the accounting rules for the fair value of certain distressed assets such as mortgage backed securities. The Financial Accounting Standards Board, or FASB as they are usually known as, now says they will allow banks and their auditors to use "significant judgement" when it comes to valuing illiquid assets. The board said that the banks should only use the new standards in cases where transactions aren't "orderly."

These changes to the mark-to-market rule have been pushed very hard by the major financial executives for many months. In recent months congress has begun to put pressure on the Financial Accounting Standards Board to make this rule change, and indeed today that change was made. This change in the mark-to-market rule will impact the amount of write downs necessary by the major banks in a huge way. Some estimates say that big banks will now be able to hike their earnings number from the first quarter of 2009 by 25% or more. The need to write down less of these illiquid assets will make the financials more able to hold onto assets that they believe will help them over the long run. In recent months banks have had to write down everything, and have also sold off profitable units to try to gain capital because of all the mark-to-market write downs.

These new changes in the fair value accounting rules will certainly help the banks in the short run, but will it equal longer term gains for these companies? It could, but only if the banks are proactive in the way they deal with their businesses. The big banks that have been cash strapped for so long, will now have a greater ability to move funds around and not be forced to sell some of their best assets. The banks must realize that a longer term change in the way they go about growing their company is still absolutely imperative. If the banks believe that this new rule will allow them to continue to try to take on risks as they have in the past, then we will come to a day where things are far worse than they are right now.

It is up to the banks and the regulators to make this new change work for the long run. Close monitoring of what kind of judgement banks and their auditors are using for writing down assets is absolutely necessary, or it is possible that this rule will be taken advantage of. If the financial executives use this change to diversify their businesses and de-leverage their balance sheets, then this could bring about real change. Let's all hope that they do the right thing!