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An accounting-rule change designed to give banks more leeway in valuing assets might undermine the government's plan to help clean up the balance sheets of Bank of America (Stock Quote: BAC), Citigroup, (Stock Quote: C), Wells Fargo (Stock Quote: WFC) and JPMorgan Chase (Stock Quote: JPM).
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Banks had been clamoring for a relief program that would allow them to unload risky subprime mortgage assets. On March 23, Treasury Secretary Timothy Geithner detailed a plan in which the government would provide cheap loans and guarantees to investors willing to buy the problem assets. Stocks rallied that day, sending the S&P 500 Index up 7.1%.
Now an accounting rule change might prompt banks to ditch the plan and hold on to their troubled assets. The relaxed rule passed last week enables banks to assign higher values to assets, making it less appealing to sell them at a loss. The amended policy could worsen the subprime loan crisis that has roiled the global economy for the past year.
The change to the mark-to-market rule permits banks to value assets based on normal market conditions. Banks were previously required to assign them fair-market values. As subprime mortgages tanked, companies were forced to recognize the losses in their earnings even if they didn't sell the securities.
