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Bankers Blast FASB Fair Value Guidance

ABA letter to SEC calls for override

October 13, 2008

By MortgageDaily.com staff

The nation's bankers are calling on the Securities and Exchange Commission override a recent accounting pronouncement on mark-to-market accounting.

A letter from the American Bankers Association today to SEC Chairman Christopher Cox requests that the regulator override a staff position on FAS Statement No. 157 issued by the Financial Accounting Standards Board on Oct. 10.

ABA said FASB's pronouncement, FSP FAS 157-3, basically ignores the intent of SEC guidance issued on Sept. 30 -- which had been lauded by the trade group.

"Given the importance of this issue, the impact it has on the crisis in the financial markets and the seeming inability of the FASB to address in a meaningful way the problems of using fair value in dysfunctional markets, we believe it is necessary for the SEC to use its statutory authority to step in and override the guidance issued by FASB," ABA wrote in its letter. "Such action is necessary to meet the SEC's obligation to provide relevant, reliable and useful information to the users of financial statements."

ABA explained that FASB's guidance does enable the use of judgment, requires that broker quotes need only be a part of the valuation process and acknowledges that distressed sales don't represent fair value. It also provides a more realistic view of observable and unobservable data.

But it then requires that liquidity risk, from the buyer's perspective, be included in the cash-flow calculation -- leading back to distressed value as the basis for valuation.

ABA also noted that large banks have too many transactions to which the staff position would apply, while small banks don't have the resources to perform the procedures. In addition, other-than-temporary impairments in an illiquid market need to be addressed.

The ability to apply the guidance to third-quarter financial statements should also be considered.

The trade group pointed to a draft from 15 European countries that met yesterday that said, "Under current exceptional circumstances, financial institutions should be allowed to value their assets consistently with risk of default assumptions rather than immediate market value which in illiquid markets may be no longer appropriate."

ABA called on the SEC to override FASB's staff position with guidance that excludes forced sales, clarify other-than-temporary impairment and suspend the proposal on accounting for securitizations. It also asked that FASB does not pursue any projects tied to fair value accounting until a congressionally mandated study is reviewed.


Mixed Reviews on Mark-To-Market Guidance
Guidance on mark-to-market won't have much of a positive impact, according to one mortgage group. But bankers and mortgage bankers cheered the clarification.

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