Accounting rule changed

The SEC changed the mark to market rule, a simple revision that could do a lot to ease the credit crisis. Power Line explains:

As the economic crisis has deepened over the last several weeks, a number of knowledgeable people have told me that the simplest thing the government could do that would have a significant effect on the availability of credit is to ease the “mark to market” rule. A couple of hours ago, the SEC did just that. . . .

The mark to market accounting rule has been a significant cause of the drying up of credit. Currently, there is no market for a broad range of financial instruments that are backed by mortgage portfolios. Under the old version of the rule, banks had to value such assets at zero. That’s not right; most of them ultimately will have value. But currently, given the uncertainties surrounding the subprime market and some of the instruments themselves, no one wants to buy them.

The effect of such asset write-downs is that the amount of money the bank is allowed to lend is reduced. Thus, the SEC’s clarification to the rule should have the effect, in the immediate future, of freeing up a considerable amount of credit.