Mark-to-Market Ruling Sparks Markets

Facing mounting and persistent pressure from lawmakers and chief executives at many Financial Companies, the Federal Accounting Standards Board (“FASB”) today announced that it will be relaxing fair-value, or the so-called “mark-to-market”, accounting rules. While this move was widely anticipated across Wall Street, and likely a component of the rally that we have seen over recent weeks, the finality of the announcement will be a certain boost to a stock market that is trying to build a solid foundation upon which to mount a sustainable recovery effort. Its passage also removes another one of the concerns around the legitimacy of this recovery attempt as many, this author included, felt that if FASB went in the opposite direction on their ruling, the markets could have turned downward in a rather dramatic fashion.

The reason that this type of accounting modification is so critical rests primarily on its impact on the Financials sector. As you will recall, Financials have suffered the greatest toll from this particular global credit crisis and are a critical part of the supply of credit that is needed to stimulate the economy. A plausible argument can be made that a large part of the pain experienced in Financials was exacerbated by mark-to-market accounting rules and the lack of the up-tick rule. I will focus on the up-tick rule in a future post but mark-to-market accounting in markets facing extreme distress can result in unrealistic, deeply discounted valuations which, in turn, have negative consequences on the balance sheets of the affected financial companies and the confidence of those who invest in these financial companies.

While the exact terms of the revised accounting standards are not known at this time, the market is clearly relieved to know that this particular concern associated with the financial downturn of 2008 has been removed and will not hinder the market (and economic) recovery that everyone is anxiously awaiting.