Pinnacle Group Gets in on Mark-to-Market Debate

The Pinnacle Group is lobbying Arkansas legislators to take their concerns regarding to mark-to-market accounting rules to Washington.

Spokesman John George said the group is currently in conversations with legislators with the hopes of suspending the mark-to-market rules for performing loans.

Mark-to-market requires banks to revalue or reappraise assets for various reasons, George said. Sometimes, it’s when a loan is up for renewal, when a property is sold or when there’s a major change in the market, he said.

“The only problem with that is when that happens, the person with the loan is required to bring in money to pay down the loan in order to get the loan within the limits of the new appraisal,” George said.

In other words, if a property is revalued at a lower rate than the actual loan on the property, the owner is required to pay the bank the difference, which likely takes away from the owner’s ability to pay the interest rates on the loan. An asset might not have the same value in today’s market that it had when the loan was originally made.

“In this economy today, the rule is extremely overbearing on the majority of what we would call good loans,” George said. “It makes good loans go bad.”

While mark-to-market accounting might be a good way to maintain fiscal responsibility in a normal market, he said, if the economy is distressed, it makes the situation worse.

Tim Yeager, University of Arkansas finance professor and Arkansas Bankers Association Chair, said he sees both sides of the debate.

“If mark-to-market is taken to its extreme, it’s harmful,” he said. “But if you take book valuations to the extreme, that’s harmful as well.

“We need a middle ground and I’m not sure where exactly that line should be drawn,” he said.

Yeager looked at 14 banks that do the majority of their business in Northwest Arkansas and found that, as of Dec. 31, 2008 those banks had $96.5 million in nonperforming loans (defined as nonaccrual loans and loans 90 days or more past due still accruing interest) related to residential property and $147.4 million in nonperforming loans related to commercial property.

“There is a growing sense that the commercial loans are weakening,” Yeager said.

There is also the sense that bad loans in the commercial sector have not yet peaked, he said.

“We’re going to start seeing some of the same things that we’ve seen in the residential sector, which is rising foreclosures as banks take over some of these buildings.”

George said he’s working on putting together a roundtable discussion with legislators in early March.

The goal is to get a dialogue going, he said, so mark-to-market accounting can be addressed as a follow-up to the Troubled Asset Relief Program legislation.

“Can they make a big impact with that bill, I don’t know,” George said. “But we need to let them know so they can take it to Washington before the ceiling falls out on everybody.”

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