Score one small victory for Richard C. Kovacevich in his crusade against financial wizards.
For the past year Wells Fargo & Co.'s chairman and chief executive officer has been among the most vocal proponents in American business for simpler accounting rules, a mission that often has put him rhetorically at odds with accounting standards boards.
So the Wells executive may have permitted himself a quick smile when the Financial Accounting Standards Board this week abandoned a plan to require banks to mark certain loan commitments to market and proposed new rules for how banks account for branch acquisitions.
The first decision was part of a long-running industry debate on when assets should be recorded at market value. In late December the FASB - with lobbying from investment banks that have treated loans like any other security and generally record them at fair value - proposed that loans commitments for certain large syndicated loans and one- to four-family conforming mortgages, among others, should be carried on banks' balance sheets at market value.
The board argued that because the assets are relatively liquid, market data on them should be relatively available.
But bank trade groups opposed the rule, and on Wednesday the FASB relented. It agreed to a compromise position that struck out many of the new requirements for marking-to-market. Syndicated loan commitments that are held for sale must be carried at market value, while companies will mark-to-market commitments for conforming one- to four-family mortgages that are originated for sale.
In addition, on Wednesday the board proposed new rules for accounting for goodwill in branch acquisitions. Under the proposal, future acquisitions may be accounted for as business combinations, and if goodwill exists, it need not be amortized unless it loses value.
Under the proposal, goodwill that was recorded for past acquisitions as an asset distinct from the intangible values associated with core deposits need not be amortized. If goodwill and core deposit intangibles were originally combined for accounting purposes, they must remain combined and continue to be amortized.
Of the two topics, fair-value accounting is the one nearer and dearer to Mr. Kovacevich's heart. He has lambasted existing accounting standards for the requirement that public securities be recorded at market value, even if the gain or loss from the investment is only on paper.
In a July interview with American Banker he called this procedure "funny accounting" that "hand-ties management in doing what's in the best interest of stockholders."
Of course, it was no joke for Wells Fargo. A plunge in the market value of technology stock shares it received from its venture capital investments contributed to a $1.1 billion charge in the second quarter.
At a Credit Suisse First Boston Corp. investors conference last month, Mr. Kovacevich kept up the heat. He called fair-value accounting "an open invitation for fraud and manipulation" and blamed it for several financial disasters, such as the failures of Drexel Burnham Lambert and Long Term Capital Management.
"The Enron debacle could never have occurred without market value accounting, the concept being pushed by the SEC and the FASB," he said. "It's a huge mistake - an event and a price can only be assured when cash is exchanged."
Mr. Kovacevich could not be reached for comment, but the small victory apparently has not changed his overall tone on the topic.
On Thursday, speaking to an audience at Washington University's Olin School of Business, he said that accounting should be based more on principles rather than rules. In that speech, according to a Dow Jones story, he said that current approach allows "financial wizards" to subvert the rules as they become more complicated.
