An accounting rule that requires banks to mark assets to their current market value hinders bank mergers and acquisitions, says JPMorgan Chase CEO Jamie Dimon.
"Capital requirements go too low in certain products," Dimon told a recent mortgage-lending forum. "You have to try to be as conservative as possible."
Dimon recently rebuffed prominent critics who say much of the recent market upheaval can be traced to what they describe as "needless mark-to-market accounting."
"It was not an accounting issue, okay?" Dimon said. "Most of the loss that people have taken will be realized."
The new rule applies even when no current or foreseeable need exists to find buyers. It forces acquiring firms to write down the value of assets from a target bank — even when the loans and securities that comprise the assets are sound — to reflect current market values.
When those values are depressed, as they are now, this mark-to-market accounting can create a negative valuation for the target bank that forces the acquirer to either raise more capital or abandon the purchase.
Though it has already been adopted, FAS rule 157 remains a topic of hot debate, sending thousands of companies in as many directions because it subjects assets and liabilities to market valuations even when valuations are elusive or markets don't exist.
Some think the rule, a part of a growing push for fair value accounting, provides guideposts; others believe it is both futile and dangerous.
Both sides agree on one point: the reliability and trustworthiness of U.S. financial reporting are the real issue here.
New research from Credit Suisse shows that companies that have adopted fair value measurement per FAS 157 find that marking assets and liabilities to market value makes economic realities clearer for all stakeholders.
Key study findings reveal serious discrepancies between how assets and liabilities are marked in the 380 S&P 500 companies used in the study.
These companies claimed $28 trillion in assets with 34 percent, or $9.5 trillion, marked to market. But of a total of $24 trillion in liabilities, a much smaller slice — only 11 percent — were marked to market.
Detractors point out that FAS 157 also encourages companies to become deadbeats because it demands that the fair value of a company's liability must reflect the risk that the company won't pay its debts.
Why? Because as the risk that companies won't pay their debts increases, their reported liabilities actually decrease.
The rewards can be huge. The same Credit Suisse study shows that widening credit spreads — which indicate a lack of creditworthiness — created first-quarter earnings gains that ranged from $11 million to $3.6 billion for 25 companies with the biggest amounts of liabilities on their balance sheets measured at fair value.
Loews CEO James Tisch strongly opposes the whole idea of providing fair values for liabilities, arguing that the notion of a company marking its own debt to market is absurd.
"In a philosophical sense, (rule 157) makes sense," Tisch says. "But it is going to destroy the notion of the income statement and make it unusable for investors who just want to see how a company did for a quarter."
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