Testifying before the Senate Committee on Banking, Housing and Urban Affairs about the financial industry bailout package, Federal Reserve Chairman Ben Bernanke defended fair value accounting, but recommended that banks should be able to sell their assets at the "hold-to-maturity" value to the federal government.

"I believe that under the Treasury program, auctions and other mechanisms could be designed that will give the market good information on what the hold-to-maturity price is for a large class of mortgage-related assets," he said.

Bernanke (pictured) noted that the assets have both a "fire sale" price and a "hold-to-maturity" price. As the fire sale price falls in comparison to the banks' traditional hold-to-maturity price, it is leading to huge writedowns, sending the fire sale prices even lower. However, he objected to the notion of eliminating mark-to-market accounting and just relying on banks' internal estimates.

He believes that the government's auction plan would provide an adequate market price if the Treasury bids for the assets at close to the hold-to-maturity price, and contends that this strategy should help the overall market. Banks will be able to revalue their own assets and attract more investors. Taxpayer losses would also be minimized, Bernanke argued, if the assets are purchased at their true hold-to-maturity prices.

Despite opposition from accounting regulators, banking groups have been calling for scaling back fair value rules. The Financial Services Roundtable is asking the Securities and Exchange Commission to issue a temporary order to "negate the negative impact" of fair value rules when the economy slumps, according to Bloomberg News. The American Bankers Association has also called for suspending fair value rules, with ABA president Edward Yingling calling them a "complete disaster." The ABA plans to meet with the SEC to discuss the matter and is sending a letter to the SEC with its recommendations.

"The fair value accounting rules are problematic in the current market, are not providing useful information to shareholders or regulators, and are having a strong pro-cyclical impact in the marketplace," wrote Yingling in his letter. "Our suggested solution: We would recommend that, given current market turmoil, the SEC provide immediate guidance that intrinsic value or economic value are appropriate proxies for fair value."

Yingling also expressed concern about proposals from the Financial Accounting Standards Board that might change the accounting for securitizations or require further use of fair value accounting. He said the ABA recommended that "there be a temporary stay on issuing any new accounting standards unless there has been a thorough analysis as to whether the proposed standards are clearly to the benefit of users of financial statements, whether fair value is pro-cyclical, and whether the impact of the proposals on the marketplace has been adequately taken into account and provided for."

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