When the Financial Accounting Standards Board implemented its Statement of Financial Accounting Standards No. 157 — commonly known as FAS 157 — late in 2007, part of the intent was to improve reporting and simplify and codify generally accepted accounting principles (see “The Number(s)”). The rule, which is still being phased in, at its core requires complex financial instruments to be marked to market. So it is being blamed by some critics for fueling the downward spiral in the banking sector. The industry has appealed to the Securities and Exchange Commission to override the board’s interpretation of FAS 157’s fair-value provision. Opponents have asked for a congressional review. They also want the SEC to suspend a proposal to upgrade accounting for securitizations and to block further beefing up of standards pending the review.
Among the board’s supporters is the Norwalk, Connecticut–based Financial Accounting Foundation, which has urged Massachusetts Representative Barney Frank, chairman of the House Financial Services Committee, to stay out of the debate. “Once Congress starts setting accounting standards through its political process, the integrity of U.S. accounting standards–setting and the credibility of U.S. financial reporting will be dangerously compromised,” wrote foundation chairman Robert Denham in a letter to the committee.
But the situation is more complex than that, counters Adele Hogan, a partner at global law firm White & Case in New York. "[The rule] understates the positives [of complex derivative securities] and overstates the negatives,” says Hogan, who favors selective exceptions. She wonders, for instance, who would benefit from requiring a company to mark to market an asset it intends to hold to maturity: “Is there a reason to be marking that security up and down each quarter when you have no intention of selling it between now and then?”
Andrey Krakovsky, a former top trader for New York–based alternative-asset management firm Highland Financial Holdings Group who is launching a long-short hedge fund that will focus on residential mortgage-backed securities. Krakovsky says it’s foolhardy to blame the credit crisis on FAS 157 and that it was the very absence of mark-to-market rules that triggered the whole mess: “It helped people hide the risk behind certain assets.”
But in a panicked market, mark-to-market is irrelevant, asserts Manny Weintraub, founder of Integre Advisors, a $343 million New York–based money management firm. He says it’s as if it’s December 24 at the mall and all the merchandise must go. “I liked it the way it was before,” he adds.
