Eight House Democrats Tuesday proposed an alternative plan for unfreezing credit markets without putting taxpayers at risk that includes dropping "mark to market" accounting rules for mortgage-backed securities and allowing the FDIC to buy "net worth certificates" in troubled banks.
The plan (view the proposal here) — based on ideas floated by former FDIC Chairman William Isaac in a Washington Post editorial — was put forward by Rep. Peter DeFazio, D-Ore., and seven other Democrats as an alternative to a $700 billion troubled-asset repurchase program voted down by the House Monday.
The bill’s supporters are not among Congress’ most influential lawmakers, and their proposal is not considered a serious rival to the plan backed by the Bush administration and House and Senate leaders. Some of its ideas have already been discussed by lawmakers who are looking at whether to amend the proposal shot down by the House Monday.
Fair-value accounting standards require banks and financial institutions to value mortgage-backed securities — investments backed by home loans — and other investments by estimating what they would be worth if they were sold on market. Because no meaningful market for such securities exists now, the "mark to market" requirement forces banks to value many of their assets at fire-sale prices, according to a summary of DeFazio’s "No Bailouts Act." That creates a capital shortfall that exists only on paper.
Returning to the economic value standard formerly employed by bank examiners would free many banks from capital shortfalls that are based on accounting issues, proponents said. Economic value standards take into account the potentially greater value of investments if they are held to maturity.
The plan voted down by the House Monday would reaffirm the U.S. Security and Exchange Commission’s authority to suspend the application of fair-value accounting standards, and requires the SEC to conduct a study of the rule’s effects on financial institutions’ balance sheets within 90 days.
The alternative plan put forward by DeFazio would go a step further, requiring the SEC to suspend the application of fair-value accounting standards.
The Center for Audit Quality, which represents the interests of investors, public company auditors and financial markets, said proposals advocating suspension of fair-value accounting rules are not in the best interest of investors or the capital markets and should be rejected.
"It is important to underscore that mark-to-market accounting has contributed positively to revelations about the severity of the economic crisis facing our country’s credit markets and certain institutions, but it did not create the economic crisis," the group said in a letter to Congress.
Many of the current requirements stem from the Savings and Loan crisis, when not knowing the real, current values of financial instruments held by financial institutions could have devastating results, the Center for Audit Quality said.
"Suspending mark-to-market accounting would throw financial reporting back to a time of less comparability, less consistency and less transparency," the group said.
Another idea dating back to the Savings and Loan crisis is allowing the FDIC to purchase net-worth certificates in troubled banks.
Isaac said the certificates — which qualifying banks could count as capital on their balance sheets — were "a big success" during the Savings and Loan crisis and "could work in the current climate. The FDIC resolved a $100 billion insolvency in the savings banks for a total cost of less than $2 billion."
DeFazio and the other lawmakers said they would introduce legislation to implement Isaac’s ideas, which also include permanent restrictions on naked short-selling of stock, restoration of the uptick rule limiting short-selling of stock, and increasing the FDIC insurance limits for individual savings accounts from $100,000 to $250,000.
Rep. Barney Frank, D-Mass. — one of the architects of the bipartisan bill to implement the Bush administration’s $700 billion troubled-asset repurchase program — has said he supports raising FDIC insurance limits.
Other lawmakers endorsing DeFazio’s proposal were Rep. Marcy Kaptur, D-Ohio; Rep. Bobby Scott, D-Va.; Rep. Elijah Cummings, D-Md.; Rep. Lloyd Doggett, D-Texas; Rep. Rush Holt, D-N.J.; Rep. Donna Edwards, D-Md.; and Rep. Mazie Hirono, D-Hawaii.
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