The release of the Treasury's plan for public-private investment funds (PPIFs) has received substantial attention and triggered a huge rally in financial stocks. However, the proposed changes in accounting rules by the Financial Accounting Standards Board (FASB) may have a more significant and lasting impact on the financial system. While they risk making financial statements even more opaque, the accounting changes, if approved, should serve to limit the debilitating cycles of write-downs and capital depletions that continue to plague the financial sector.
The first proposal (a modification of FAS 157) allows firms to determine whether a market price is "associated with a distressed transaction" for valuation purposes. If the subject transaction is judged to be distressed, the institution can use alternative valuation methodologies to either adjust the quoted price of the security or, in some cases, ignore the market price entirely.