A bipartisan panel of legislators pressed for changes to mark-to-market accounting rules on Thursday, telling a trio of regulators that the accounting standard was exacerbating the financial crisis and needed to be reformed.
The call came with the threat of congressional action if unheeded. If the regulators haven't proposed a way to reform the rule within three weeks, the committee chairman told them, he'd call them back before the panel and press for reform at the congressional rather than regulatory level.
"Now they've basically been sent back and we've said, 'Get this damn thing done,'" the subcommittee's top Democrat told the Huffington Post, "'If you don't get it done we're going to take it out of your hands and put it in the hands of other people."
Over the past several weeks, Rep. Paul Kanjorski (D-Penn.) has been working with Rep. Scott Garrett (R-N.J.) to persuade members of the Financial Services Subcommittee on Capital Markets, Insurance, and Government Sponsored Enterprises that the accounting rule needs to be modified. The lobbying effort, said Kanjorski, has relied on member-to-member meetings in which the rule is explained and the case for modifying it is made.
Kanjorski is chairman of the subcommittee and Garrett is the highest-ranking Republican. A Garrett aide confirmed the cooperative effort. "They work together as a great team," she said.
Judging by the comments of members of the committee at today's hearing, the effort has been a success. After the hearing, Kanjorski told the Huffington Post that he was pleased at the bipartisan agreement. "It's probably a milestone here in Congress," he said.
Kanjorski called James Kroeker, acting chief accountant for the Securities and Exchange Commission; Robert Herz, chairman of the Financial Accounting Standards Board; and Kevin Bailey, deputy comptroller for regulatory policy at the Office of the Comptroller of the Currency before his subcommittee.
"Unfortunately," Garrett told the regulators, "I believe that during the market turbulence over the last year, fair value or mark-to-market accounting has prevented investors and the general public alike from obtaining the true value of many financial institutions' balance sheets. This method of accounting has its merits when the market is functioning correctly, but it has significant downsides when the market is broken."
Mark-to-market accounting requires banks to value an asset at its most current market value. In a frozen market, where assets can't be sold for anything more than a fire-sale price, that value is extremely low, forcing banks to write-down a loss on their balance sheets. With a loss on the books, the bank can lend less money and is required to raise capital to meet regulatory lending standards. That necessity can require the sale of more assets, which further drives down values.
"It is this negative feedback loop that is exacerbated by the combination of accounting practices and capital requirements," said Garrett. "I am interested in hearing further from Mr. Bailey about what the OCC and other banking regulators are considering to address how regulatory capital levels are examined during a non-functioning market."
Kanjorski said that none of the regulators have wanted to tackle the issue. "They all have a very difficult time. Both FASB and the SEC have been [saying], 'It's your fault. It's your fault,'" he said.
Asked if he's optimistic that the regulatory bodies will be able to work together to reform the rule, Kanjorski replied, "You never know."
"People with the best of intentions get back out there and sometimes their bureaucracy starts to swallow them up. But if it does, I think we put them on notice that we'll take action."