HERZ LEAVING MARKS BOON FOR BANKS / THE WALL STREET JOURNAL ( A MUST READ )

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AUGUST 25, 2010.

Herz Leaving Marks Boon for Banks .

By DAVID REILLY

A new front has opened up in the war over mark-to-market accounting. Suddenly banks find themselves with an unexpected advantage in the fight over how they should value their vast holdings of financial instruments.

That is due to the surprise announcement Tuesday of the departure of Robert Herz as chairman of the Financial Accounting Standards Board. This will give banks an opportunity to push for a successor who is more friendly to their views on the mark-to-market question, as well as the overall idea that accounting should be for more than just investors.

Mr. Herz had backed a recent proposal to expand the use of market-value accounting to banks' loan books. That is in contrast to current practice, in which banks value loans at their cost and create a reserve based on management expectations of how the assets will perform. While the plan to require banks to mark loans wouldn't automatically affect earnings or measures of regulatory capital, it could hit banks' common equity.

Now, with Mr. Herz out of the picture, the future of the rule change may be in doubt. That may cheer some bank investors. But it would prove a longer-term setback for markets and investors overall.

FASB's proposal is a well-intentioned, even if far-from-perfect, compromise that would allow investors to see both what markets and bank executives think assets are worth. Giving investors more information is exactly what accounting should be doing.

FASB's overseers should keep that in mind as they contemplate a successor to Mr. Herz, and listen to what will undoubtedly be a long line of bank lobbyists helpfully suggesting potential candidates.

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