CBS 5 Investigates With Anna Werner

SAN FRANCISCO (CBS 5) ― The government bailout bill is pumping billions of dollars into the financial system. But what many Americans don't realize is that a provision of the bill could change the rules of the game regarding how banks keep their books. Some say that could make things worse instead of better.

It's just one of many changes, this particular one having to do with how banks value assets, especially those mortgage-backed securities you've been hearing so much about. It's something called "Mark to Market," a technical accounting rule. And although it sounds technical, the rule is the subject of an intense debate, over whether changing it might make it harder to keep banks honest.

Among the mortgage bankers meeting for their annual convention in San Francisco this week, those accounting rules are a hot topic.

"This is a product of well intended ideas gone wrong," former MBA board member Richard Jones told CBS 5 Investigates. Jones is among many mortgage bankers who believe the rules put in place to help establish values for some assets could be making the financial crisis worse.

What are banks concerned about? With assets like mortgage-backed securities dropping in value, banks' bottom lines are looking increasingly shaky. "It continuously reinforces a negative feedback cycle that reduces the value of balance sheets of lenders," Jones told CBS 5.

And Jones said that has more widespread consequences. "As their balance sheets are reduced, their ability to lend is impaired. And they are restricting credit further to Main Street, so it actually affects the real world in a very direct way," he said.

It all has to do with a provision called "Mark to Market" that in some cases, tells banks to value assets for what they would be worth if they sold them in today's market.

But some bankers argue the current market doesn't give a true reflection of what those assets are really worth, that they could be worth much more in the future and they should be valued that way. For instance with a method called "Mark to Model," which takes other factors into account and gives those assets generally higher values.

It's something that would improve banks' bottom lines. Stanford Professor Kenneth Scott said "There is, shall we say, an obvious reason for management to want higher values not lower values." But Scott, who is a corporate governance and banking expert, said that may not give investors confidence in those banks and those assets.

"If you change the rules to place a value on an instrument of very uncertain value, then all you're doing is increasing the uncertainty and decreasing the reliability of the numbers that are on the bank's balance sheets. And that is where a lot of the problem is," Scott said.

CBS 5 Investigates asked Scott: "So basically they don't know whether they are sort of fudging the numbers?"

His answer: "Yes that's correct."

So, CBS 5 Investigates asked Richard Jones: "If you change the rules, are you going to have the transparency that you may need to assure investors that they are seeing, what is real?"

"It's a very good question. And there's no agreement inside the banks, outside the banks, in the investment community, in the political community as to how this problem should be resolved," Jones said.

You'll be hearing more about this soon. As part of the bailout bill, Congress has asked the Securities and Exchange Commission to study these issues and hearings are planned for the end of the month.

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