US relaxes fair value rules

The US standard-setter has relaxed fair value accounting rules for bank
assets in a move that allows them to ignore market prices where the market for
those assets is judged to be illiquid or distressed.

In a bid to reduce pressure on banks carrying toxic assets on their balance
sheets, the Financial Accounting Standards Board also voted to allow banks to
book smaller losses on impaired assets that are listed for sale.

US markets reacted strongly, welcoming FASB’s decision. The Dow Jones Index
topped 8,000 for the first time since 9 February. The cheer spread to the UK,
where the FTSE 100 rose 4.3 per cent to 4,125 in the first time it has closed
above 4,000 for more than a month.

However, the move is likely to alarm investors who have argued that relaxing
fair value accounting rules will make company accounts less transparent, and
possibly misleading.

The relaxation of the fair value rule follows heavy lobbying by banks and
politicians who have blamed the rule for worsening the economic crisis by
forcing banks to announce huge write downs in assets.

Together, US banks hold trillions of dollars of mortgage-related assets,
which have not been traded for 18 months. There have been a few trades at deeply
discounted prices, forcing banks that hold these securities to make massive
write-downs on the value of their portfolios.

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