PhillyDeals: SEC eases up an accounting rule

The

Securities and Exchange Commission

has changed course, easing an accounting rule just in time for banks to boost their third-quarter 2008 profit reports, which investors fear will be Halloween-scary.

After the Enron Corp. accounting scandals showed how easy it was for a company to cover investment losses until it was too late to write them off, the Financial Accounting Standards Board, backed by the SEC, told firms they had to "mark-to-market" their investment securities.

That means they had to say what the securities were worth if they were sold today, instead of fudging with some higher previous or hoped-for price.

Then home prices fell, home-loan bond values collapsed, other debt markets got sucked in, and suddenly banks like Washington Mutual Inc. and insurers like American International Group Inc. were marking down piles of assets, desperately raising capital to cover the losses, and threatening to pull their clients into a recession.

Not all of the marked-down assets were fatally hurt. Some values fell because markets had dried up, and it was hard to get anyone to bid. Banks argued that this was temporary and that they shouldn't have to mark values all the way down.

But the auditors who check their books remembered what happened to Enron's accountants. They wanted an all-clear from the federal government before they'd ease up.

In March, investment banker Joseph Longino, of Sandler O'Neill & Partners L.P., pleaded with SEC Chairman Christopher Cox to let auditors know they wouldn't go to prison if they held off reporting temporary drops in asset value due to frozen markets.

It typically takes the SEC years to act on rules like that, warned auditor John McLaughlin, of Smart & Associates L.L.P., of Devon.

Then Washington Mutual blew up, wiping out bondholders, and Wachovia Corp. was sold for pennies on the dollar, wiping out shareholders. Last week the American Bankers' Association joined the call for easing up.

Late Tuesday, the SEC caved. Fallen bond prices "may be an input when measuring fair value, but are not necessarily determinative if an active market does not exist for the security," the agency announced.

That means "the SEC will be more forgiving," wrote Friedman, Billings, Ramsey & Co. Inc. analyst Scott Valentin. This will "provide a respite," he said, to capital-hungry banks - notably giants such as Bank of America Corp., JPMorgan Chase & Co., and Citigroup Inc. - though it might not be enough to "restor(e) investor confidence" in banks with "toxic or exotic securities."

Meanwhile in Congress, Republicans pushed to kill mark-to-market accounting altogether. That brought protests from the Council of Institutional Investors and auditors' groups, which have fought for years to make firms report what they own and what it's really worth. By easing, not eliminating, the new rules, the SEC has done enough for now, they said.

Bethlehem venture capitalist Mike Bolton doesn't like what's happening in the debt markets. But he trusts government regulators and the firms they watch more than the Congress members he has watched fighting over how to fix what's broken.

The following critical areas can be addressed without the financial-rescue bill, Bolton wrote in a letter to Democratic House leaders:

Changing mark-to-market regulations, raising the FDIC deposit insurance limit to $250,000, and punishing "manipulative" short-sellers and other speculators.

"Each day, the Fed, SEC, FDIC, FASB (Federal Accounting Standards Board) and the financial-market firms are showing that they can develop innovative solutions to the financial crisis, and several bank stocks - PNC, Wells Fargo - are now at their highs for the year," he concluded.

Aluminum Shapes L.L.C., of Pennsauken, and its affiliates, one of the biggest industrial employers in South Jersey, have replaced top managers and reduced employment to about 700 from the 1,000 workers it had when it filed for bankruptcy protection last spring, acting president Tom Evans confirmed.

Shapes was purchased in August by H.I.G. Capital Partners L.L.C., of Miami, for $30 million plus debt and other liabilities. The slowdown in truck construction and home building has reduced demand for its aluminum and plastic pieces, said Evans, who replaced Steve Grabell after the purchase.

Grabell had said the new owner expected "no layoffs," but as markets have remained weak the company has cut foreman positions and left some jobs vacant, according to employees.

Shapes management would like to automate more work, Evans said. H.I.G. has acquired four other U.S. aluminum plants since 2005; they do business as Signature Aluminum Inc.