The Corner

New Accounting Rules for Mortgage-Backed Securities

According to the New York Times:

The independent Financial Accounting Standards Board voted to adopt guidelines under the so-called mark-to-market accounting rules, which require companies to value assets at prices reflecting current market conditions.

The changes could reduce the losses banks have been forced to report as the values of their mortgage-backed securities have crumbled. The decision will allow the assets to be valued at what they would go for in an “orderly” sale, as opposed to a forced or distressed sale. The new guidelines will apply to the second quarter that began this month.

It was never clear to me whether reforming mark-to-market rules was a good idea. Some experts say it is, others disagree. My understanding is that mark-to-market rules are good rules in principle. Supposedly, it was the timing of the reform at the end of 2007 that helped fuel the crisis. I would appreciate your opinions on this issue.

That being said, markets are responding positively to the reform, says the Wall Street Journal:

Stocks jumped on the news, pushing the Dow Jones Industrial Average up more than 250 points and above 8000 for the first time since February 10 as bank stocks rose.

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