Morgan Stanley increased its use of historical cost accounting for corporate loan commitments, joining Goldman Sachs Group Inc. in moving away from the mark-to-market approach the firms had earlier used.
Morgan Stanley raised the amount of loans and lending commitments that it accounted for as “held for investment,” or HFI, to $9.7 billion in the fourth quarter from $800 million a year earlier. Goldman Sachs decided to make the change to some of its corporate loan book, the Wall Street Journal reported yesterday, citing people familiar with the matter.
Both New York-based firms had losses on relationship lending last year and face differing treatment from regulators between HFI and fair-value commitments. Fair-value accounting often requires firms to book losses on the commitments, even if they aren't tapped by the borrowers, while commercial bank competitors avoid mark-to-market declines by holding the commitments at historical cost.
“We are still fanatical believers in mark-to-market,” Goldman Sachs Chief Financial Officer David Viniar said on a conference call with analysts last month. “Substantially all of our assets today are mark-to-market. Our risk is managed on a mark-to-market basis. And whatever we conclude on what I'll call a very small portion of assets, just relationship lending, those statements will still be true.”
Morgan Stanley had about $400 million of losses in the third quarter from corporate lending, the majority of which is unfunded commitments. Goldman Sachs had $1 billion in unrealized losses related to relationship lending for 2011. Michael DuVally, a Goldman Sachs spokesman, declined to comment on whether the firm made a decision on the accounting treatment.
Consideration of the change was also being driven by “more onerous capital treatment” of mark-to-market commitments compared to similar HFI assets, Viniar said. Fair-value loans “were penalized substantially more than HFI loans,” in the Federal Reserve's annual review of banks' capital plans, Morgan Stanley CFO Ruth Porat said last month.
Morgan Stanley is working to increase lending as it gains more deposits through buying Citigroup's remaining stake in the Morgan Stanley Smith Barney brokerage, which had $110.6 billion in deposits as of Dec. 31. Total corporate loans and commitments rose to $82.9 billion at the end of 2011 from $69.1 billion a year earlier.
“Fundamentally, we are a mark-to-market shop,” Porat said last month. “As it relates to the loan book, we obviously have a bank. We're the fifteenth-largest U.S. depository by deposits, and so we're always considering what makes sense in terms of capital and funding efficiency.”
Commercial banks helped fight off a proposal last year from the Financial Accounting Standards Board that sought to make them mark loans to market. The panel sets U.S. accounting standards.
Goldman Sachs told Norwalk, Connecticut-based FASB during the comment period for that proposal that banks hide losses on loans used to generate investment-banking fees and should be required to report the loans at fair value.
Bloomberg News
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