Optimism prevailed in the stock market on Thursday with many investors more hopeful than they’ve been in a long time that the financial system may soon stabilize.
The positive tone stemmed from a decision to relax rules on how banks price assets, know as mark-to-market rules. As you well know, mark-to-market has been widely criticized a key factor that forced institutions to take hefty write-downs.
"Psychologically it's a big boost," says Bucky Hellwig, senior vice president at Morgan Asset Management "What it does is probably takes away the fear of imminent bank collapse."
Mark-to-market accounting requires assets to be valued at current market prices. Banks had complained that it forced them to mark down assets to artificially low prices in the current financial crisis, even if they intended to hold the assets past the current reporting period.
The five-member Financial Accounting Standards Board voted unanimously for the new guidance on valuing assets, but split 3-2 in backing new guidance on how to write-down impaired assets.
The changes to mark-to-market accounting will take effect in the second quarter for most U.S. financial firms, but early adoption could be allowed for first quarter results.
Advocates of the changes argue that pricing assets to firesale prices during a time of inactive markets has exacerbated the financial crisis through writedowns, big earnings hits, damage to capital ratios, and a reduced ability to lend.