[JURIST] The US Securities and Exchange Commission (SEC) [official website] said Tuesday that it has begun an agency review [SEC statement] of US financial accounting procedures, including "mark-to-market" [SEC backgrounder] rules, pursuant to the recently-passed $700 billion financial rescue bill [JURIST report]. The SEC statement coincided with the testimony Tuesday of current and former executives of insurance giant American International Group (AIG) [corporate website; JURIST news archive] before the House Committee on Oversight and Government Reform [committee website; testimony materials]. AIG was the recipient of a $85 billion bridge loan from the US Federal Reserve [official website] due to financial instability that many of the former and current AIG officials attributed in some part to the ramifications of the mark-to-market accounting rules. In a prepared statement [text, PDF], Martin Sullivan, who was President and CEO of AIG from March 2005 to June 2008, discussed the effect of the mark-to-market rule on AIG, saying:
The accounting rules require that certain assets be "marked to market." In other words, companies must declare the value of those assets, on a quarterly basis, at the price such assets could sell for on the market at that point in time. Companies must declare these values on their books even if they have no intention of, or immediate need to, sell the assets, and even if they have not realized any actual gain or actual loss. FAS 157, which was adopted relatively recently, set out specific guidelines as to how companies must determine the "market price" of certain categories of assets. However well FAS 157 operates under any reasonably foreseeable market conditions, in the unprecedented credit crisis which began in the summer of 2007, FAS 157 had, in my opinion, unintended consequences. ... [J]ust last week both the Securities Exchange Commission and this Congress recognized the effect of FAS 157. The SEC recognized that FAS 157 can have unintended consequences for financial institutions when markets seize up. The SEC has attempted to provide more flexibility for companies operating and reporting under the rule. In the recently passed legislation, Congress directs the SEC to further examine mark-to-market accounting and grants the SEC authority to suspend mark-to-market accounting requirements.AP has more.
The $85 billion bridge loan is intended to allow AIG time to sell off its assets in an orderly fashion in order to avoid the negative consequences of a bankruptcy or collapse during the current financial crisis. The House passed the $700 billion rescue bill in an attempt to limit the effects of the crisis on the larger US economy and international markets. Last month, members of Congress urged [JURIST report] regulatory changes and investigations following a stock market drop propelled by Lehman Brothers' Chapter 11 bankruptcy filing and the sale of Merrill Lynch [AP report].