Wall Street warns regulators not to rush accounting change

A looming accounting change that sparked a sell-off in Fannie Mae’s and Freddie Mac’s stocks earlier this month could cause broader disruption in the markets if it is rushed by regulators, Wall Street lobbyists are telling lawmakers.

The change, which has yet to be detailed by the Financial Accounting Standards Board (FASB), could potentially affect trillions of dollars of mortgage-backed securities and other assets that banks package and sell to investors.

{mosads}Financial industry lobbyists fear that FASB will plow ahead with its year-end deadline to implement the new rule, forcing banks to take the securitized assets back onto their balance sheets, jolting already-fragile financial markets.

“These rushed and sweeping changes could single-handedly erase the efforts of policymakers to restore the stability and liquidity in our markets,” said Brendan Reilly, the senior vice president for government relations at the Commercial Mortgage Securities Association .

FASB has been pondering changes to the financial accounting of securitization deals for years. It began to hasten its work on the project late last year after the Securities and Exchange Commission (SEC), which has final say on accounting changes, asked the agency to finalize new rules in time to implement them by Jan. 1, 2009.

Lobbyists say that they aren’t opposed to the change per se, but worry that too much time pressure could produce a poor result. They also warn against the announcement of sweeping changes to accounting rules while the markets are still roiling from the credit crunch.

Fast-tracking the rule change could result in “a set of rules that aren’t logical or consistent,” the executive director of the American Securitization Forum , George Miller, said. The group, along with the Securities Industry and Financial Markets Association , sent a letter to FASB two weeks ago urging it to push back its deadline.

FASB has signaled that it is open to postponing the implementation of the accounting change, though not necessarily slowing down its timetable for drafting the new rules. The agency’s board will meet on Wednesday to discuss the possibility of delaying the effective date, according to Neal McGarity, a FASB spokesman.

“Users have told us that it would be less complex if the standard was implemented at one time rather than over a period of time,” he said in a statement Tuesday. “Given the merits of this idea, further discussion about it in our Wednesday board meeting seems prudent.”

House Financial Services panel Chairman Barney Frank (D-Mass.) said that he and his staff have had concerns about the rule change “depending on how it’s done.”

But he argued that the mere announcement of the change wouldn’t disrupt the markets as long as the rule was drafted properly and the media reported on it “responsibly.”

“My view is that we should not try to retard accurate accounting rules, but we can have some flexibility over what’s triggered by that,” he said.

Financial industry lobbyists have had some success pressing their case on Capitol Hill in recent weeks.

Senior staff from both parties on the House Financial Services Committee voiced concerns about the accounting change to FASB officials during a meeting earlier this month. In particular, they expressed worry that the agency would unveil its proposal for the change in mid-to-late August, potentially jolting markets when lawmakers won’t be around to respond.

“It is a bipartisan concern that FASB could propose a rule that has unintended consequences in the marketplace,” a senior Capitol Hill aide who works on the issue said.

The ranking member on the House Financial Services Committee, Rep. Spencer Bachus (R-Ala.), last week wrote to SEC Chairman Christopher Cox and FASB Chairman Robert H. Herz asking them to delay the rule change until Jan. 1, 2010.

Meanwhile, Rep. Patrick McHenry (R-N.C.) questioned Cox and New York Federal Reserve President Timothy Geithner about the timeline for the change in a hearing last Thursday before the Financial Services Committee.

Cox replied, “I think it’s wrong to say that this is being fast-tracked.”

He added, “In terms of effective dates that they are considering in their proposal, we are talking years into the future.”

Scrutiny of the rules governing securitization deals comes amid concerns that banks helped to spur the housing mess by packaging bad loans and then selling them to investors.

Such securitizations were typically sold with what amounts to a money-back guarantee — that if the underlying asset fails, the institution that sold it will buy it back. Many banks were forced to bring securitizations back on their books, prompting complaints from investors who said they didn’t know about them.

The accounting change would likely force banks to hold more capital against such deals, or could potentially scrap altogether the structure that allows for the majority of securitization deals, financial industry lobbyists said.

In a report earlier this month, analysts at the investment bank Lehman Brothers wrote that the change would force Fannie Mae and Freddie Mac, some of the biggest securitizers of mortgages, to raise huge sums of capital.

Word of the report spread, causing the stock prices of the two mortgage giants to plummet. Frank faulted what he called an inaccurate newspaper article for causing the panic because it failed to mention Lehman Brothers’s opinion that the companies would be exempted from the change.

“Sometimes the media reports things too sensationally,” he said.