Changing Accounting Rules Key to Solving the Credit Crisis?

At least it seems like a way to go according to this article.

"The SEC has destroyed about $500 billion of capital by their continued insistence that mortgage-backed securities be valued at market value when there is no market," said William Isaac, a former chairman of the FDIC.

"And because banks essentially lend $10 for every dollar of capital they have, they've essentially destroyed $5 trillion in lending capacity," he added.

Isaac believes that since the overwhelming majority of loans packaged together in even the weakest MBS pools are not in foreclosure, it is proper to value these securities based on the flow of cash from all the loans instead of a non-existent market value.

I was thinking about this as well. Why does a firm have to try to find a market value for a security that there is no market for? It is like forcing paper losses on the books just because you aren't able to sell the securities at the current time. You should be able to take the loss when you actually sell the item and not just because you have it on your books.

Also the nationwide foreclosure rate is just 2.8%. There are currently $12 trillion in outstanding mortgages in the US so that means $336 billion are in foreclosure. These companies have written down $500 billion already so they are approaching about double the amount of total foreclosures.

The only thing that would be interesting is to see how this effects how credit agencies grade their debt. Most of the bank failures came from a credit downgrade that forced a rush for capital or a merger. I think those credit agencies need an overhaul next.