In order to bring more order and transparency to financial firm balance sheets, there was a shift from valuing balance-sheet assets at their purchase price to holding assets at fair market value – or the price the assets would fetch out in the marketplace if they were sold.

In mid-November, with the U.S. subprime mortgage crisis already taking its toll on global financial firms, the Financial Accounting Standards Board (FASB) released Statement No. 157, entitled “Fair Value Measurements.”

Due to the timing of its issuance, FASB 157 has been pointed to by many as a cause for the financial crisis currently gripping the United States and other markets abroad. But it is important to note that FASB 157 only clarified the fair-value accounting practices that had already been in place for decades – with perhaps one noted exception.

"FASB 157 is not the primary cause of this crisis - greed and poor judgment are," Paul Shifrin, a principal at SC&H Group LLC, a Maryland CPA and management-consulting firm, said in an interview with Money Morning.

What FASB 157 did introduce was an asset hierarchy based on the market available for the assets. Assets are assigned to one of three categories based upon how liquid the assets actually are and, in turn, how easy they are to value, or price:

• Level 1 assets are fully liquid, and easy to price.
• Level 2 assets can be priced with the benefit of "comparable assets."
• And Level 3 assets are completely illiquid and nearly impossible to price.

A Growing Crisis

As the market for MBS and collateralized-debt obligations (CDO) dried up, financial firms were caught holding billions in securities for which there was no longer a market. That led to a steep decline in prices and huge write-downs, which translated into escalating quarterly losses. These complex securities, which had been “Level 1” assets, were quickly becoming “Level 3” assets.

But rather than place the blame on the over-leveraging or the risky securities in question, some politicians and banking lobbyists blamed mark-to-market accounting for the resulting huge losses at global financial firms.

“Onerous mark-to-market rules for certain financial assets that have no market value have worsened the credit crisis, and changing them has been a priority for House Republicans,” U.S. Rep. John Boehner, R-Ohio recently told The Wall Street Journal reported.

Congress and such financial-firm lobbying groups such as the American Bankers Association have called for a relaxing of the mark-to-market rules. But doing so would represent a grave error, says Money Morning’s Gilani.

“Nobody is going to trust anybody,” says Gilani. “That’s a real problem if you do away with mark-to-market accounting.”

And that’s an even bigger problem in a market that is already seized up with a crisis of confidence.