Just days after Congress echoed the industry's criticisms, the Financial Accounting Standards Board (FASB) moved Monday to ease rules that have resulted in massive writedowns.
The proposals, to be released today for 15 days of public comment, are designed to reduce the scale of other-than-temporary impairment charges and help institutions comply with mark-to-market accounting rules for illiquid assets.
"This is a clear victory for the industry," since the FASB is "trying to give people the flexibility to have a higher value if that's what they believe," said Kip Weissman, a partner at Luse Gorman Pomerenk & Schick. "It's a new chapter."
The proposals could close the door on an ugly period for financial institutions.
The industry has been saddled with massive charges as mortgage holdings have soured. Wells Fargo & Co. wrote its securities portfolio down by $473 million in the fourth quarter alone to account for such charges. Last year the Federal Home Loan banks took nearly $1.8 billion of other-than-temporary impairment charges on mortgages they insist are of high quality.
Those charges will remain on the books, but the FASB proposals could come just in time for bankers' first-quarter reports.
Under the proposals, if a company planned to hold assets until prices recovered or the holdings matured, a charge would be recognized only in the event of an expected credit loss. Even then, the charge would amount only to the credit loss.
Jim Vogel, the head of fixed-income research at First Horizon National Corp.'s First Financial Capital Markets Corp., said the change "should give investors the opportunity to catch their breath and decide for themselves whether the market value declines are directly related to credit, or are they really temporary and will recover."
But Joshua Rosner, the managing director of the research firm Graham Fisher & Co., said it would be premature for bankers to celebrate, since many of their holdings still carry substantial credit risk. "The vast majority of the losses that have been recognized in held to maturity are credit losses," he said. "At the end of the day, OTTI was always intended to capture credit losses first and foremost."
Other concerns also remain. Although the proposal would only require banks to record a loss on the credit impairment, the remaining charge would still count against other comprehensive income, which would deplete capital.
Industry representatives argued that only the credit loss should count. "OTTI should be related to credit losses, not market losses," said Donna Fisher, a senior vice president of tax and accounting at the American Bankers Association.
Despite those concerns, the FASB weighed other options that would have been less attractive for the industry.
One option, which was supported by the board's staff, would have applied only to debt securities, not equities. A third option also would have been limited to debt securities but would have split off credit losses from other losses.
A separate proposal is intended to provide more clarification on how mark-to-market accounting can be applied to illiquid assets.
The FASB clarified that accountants do not have to look simply at the price at which an asset last traded to determine value. They may also consider cash-flow models that give a sense of how much an asset might earn.
In an appearance before a House Financial Services subcommittee last week, FASB Chairman Robert Herz expressed frustration that auditors look only at recent trades. "We've told people repeatedly that it's not a last-trade model," he said. "But for some reason, that keeps happening."
Joseph Longino, a principal at Sandler O'Neill & Partners, questioned whether the guidance would be strong enough to shake a deeply ingrained bias in the auditing community toward last trades, which can help insulate accountants from lawsuits.
"It is a severe bias that is so well known, both by entities that are subject to GAAP and the public accounting firms that have to apply GAAP, that it's going to be very hard for FASB to reverse course and offer some breathing room," Longino said. "Short of a mea culpa from the FASB, I just don't think that the message is going to get out."