05/02/2009 05:12 am ET Updated May 25, 2011

FAS 157-e: Accounting Change Could Undermine Treasury's Toxic Asset Plan

A vote is scheduled Thursday on a proposed accounting rule change that could undermine the Treasury's toxic asset plan, the Wall Street Journal reported.

The proposal, FAS 157-e, put forward by the Financial Accounting Standards Board, would give banks more discretion over mark-to-market accounting.

Mark-to-market accounting requires that banks mark illiquid assets to their market values--often much lower than their intrinsic values--leading to large write-downs. Banks argue this is unfair because they are not necessarily planning to sell the assets, and that the market value is temporary.

Proponents of mark-to-market accounting say that the rule is critical for transparency. That bank balance sheets are complicated enough, and to allow banks to have more freedom in the value they assign these hard-to-trade assets will only make their finances harder to understand.

According to the WSJ, if banks have more discretion to value these illiquid assets, more institutions will likely want to keep them on their books. But the emphasis of the Treasury's toxic asset plan is to rid the bank of these assets.

"There is no clear definition of what a toxic asset is," said Christopher Hoeffel, president of the Commercial Mortgage Securities Association. "Some bankers are saying, 'I don't want to sell these assets, because the loan might still be good -- and if I hold it to maturity, I might get my money back.'"

That seems to run counter to the Treasury plan, which could spend up to $1 trillion to remove impaired assets from banks' balance sheets. There is strong Wall Street support for Treasury's program, with some investors advocating a complete cleanup of assets via the Treasury program.

On Tuesday, Arianna interviewed House Financial Services Chairman Barney Frank on CNBC's Squawk Box on the accounting rule. She called the proposal to allow more bank discretion "watering down."