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Change the accounting rules and suspend mark to market

It's not too late to enact a better plan than the one the Treasury has put on the table. Peter Lee looks at alternative strategies that might prove sharper than Paulson's bailout plan.

Rewrite the numbers

If the government doesn’t want to take this route but still wants to reduce the risk of bank insolvency arising from P&L hits on troubled mortgage assets, there might be an even quicker, cheaper way. Let’s just change the accounting. If banks and financial institutions could just treat their cashflow models as the actual price of troubled assets, they might avoid the big hits to the P&L and reduction of capital and so be able to carry on lending in ways that would stabilize asset prices.

On September 30, French president Nicolas Sarkozy was set to appeal to fellow EU leaders to relax the accounting rules, having met French financial leaders at the Elysée Palace.

It’s an idea worth considering, if not one that Euromoney would wholeheartedly endorse.

On September 22, Floyd Stoner, executive vice-president, congressional relations and public policy, at the American Bankers Association, urged members of the Senate and the House of Representatives to consider “how current and proposed ‘fair value’ and other accounting rules are exacerbating the problems in the financial markets”, and arguing that the SEC “should take action prior to September 30 to recognize that it is virtually impossible to establish fair value in this environment”.

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