The top Democrat and Republican on the House Financial Services Committee both spoke out favorably Thursday about new mark-to-market accounting guidelines announced by the Financial Accounting Standards Board.
The new guidelines give financial institutions leeway in determining whether an asset is able to be sold or not. If they determine it can't be sold, then they are not required to write down a loss on their books - though they are required to take a "credit loss," a change to the original proposal. The rules change has been a top priority of the financial industry.
The move comes three weeks after a bipartisan congressional panel called for such changes - and called for the changes to be made within three weeks.
Two board members dissented from the rule change. The final rules will be released next week, said an FASB spokesman.
"These are extraordinary times," said the spokesperson. "Our decisions rarely please everyone, but we believe we have helped market participants this week with these actions."
Financial Services Committee Chairman Barney Frank (D-Mass.) agreed. "I applaud the very important actions taken by FASB today, which has made significant progress toward addressing inaccurate asset valuations in the markets. The FASB believes the rule can be applied more fairly and take into account the currently dysfunctional state of some markets," he said in a statement. "The integrity of the standard-setting process is preserved, while avoiding the pro-cyclical effects of improper valuation practices."
The banking industry has been pressing for the change for months, arguing that if an asset is still performing - still getting mortgage payments, for instance - then cash flow accounting is more appropriate than mark-to-market, because the write downs lead to further write downs, and so on. But allowing banks to determine which assets they take losses on and which they don't gives banks significant say over their books, leeway some have abused in the past.
The rule goes into effect immediately but can be used for the first quarter, so first quarter balance sheets will be rosier than they would have otherwise.
The move marks a shift for Robert Herz, head of the FASB, who told the panel of lawmakers three weeks ago that the harshest critics of mark-to-market accounting practices have been the very same banks that have gone under when regulators would not let them adjust their accounting.
"Today's announcement that the FASB will be adjusting mark to market rules is long overdue," said Rep. Spencer Bachus (R-Ala.). "Financial institutions and community banks have been adversely affected by the rigid application of these rules during this financial crisis, causing further instability in the banking system."
Rep. Paul Kanjorski (D-Pa.), who chaired the committee hearing that pressed for the changes, told the Huffington Post the new rules were a "good compromise."
Treasury Secretary Timothy Geithner had previously called the proposed rule a "constructive set of changes."
Rep. Alan Grayson (D-FLa.) spoke out against the change at the hearing three weeks ago. "That's representative of exactly the kind of thing that's put us in this position in general," he told the Huffington Post afterwards. "We have people who break every rule in the book and then they think that the answer to their problems is to break more rules. It's given us some real insight into the human nature and the pathology of the people who have created these problems for America."