March 14 (Bloomberg) -- Fair-value accounting rules don’t make sense when there’s no market to accurately price securities, Wells Fargo & Co. Chairman Richard Kovacevich said.

“Mark-to-market is fundamentally not about a quote on a screen,” Kovacevich said yesterday in a speech at Stanford University in California. “It should always be about expected cash flows.”

Mark-to-market accounting requires companies to set a value on most securities every quarter, based on market prices. Banks including Citigroup Inc. have said the rule doesn’t work when trading freezes because banks must write down the assets to pennies on the dollar. The rules were designed to enhance transparency in bank balance sheets and indicate true financial health, according to investor groups and the accounting industry.

Robert Herz, chairman of the Financial Accounting Standards Board, may encourage bank executives to be flexible in valuing their assets, he said in an interview yesterday after testifying at a House subcommittee hearing. Banks and securities firms worldwide have racked up more than $1.2 trillion in losses and credit writedowns amid the worst financial crisis since the Great Depression.

Kovacevich, 65, said that 90 percent of the assets that led to those losses are from loans that were originated between 2005 and 2007 when credit was cheap and banks ignored underwriting standards.

‘Total Disregard’

“This was caused by a total disregard by financial institutions’ management of basic risk,” Kovacevich said. “It should not have ever happened: It was caused by human error and human malfeasance.”

Wells Fargo, the second-biggest U.S. home lender, reported its first loss since 2001 in the fourth quarter after accounting for the acquisition of troubled home lender Wachovia Corp. On March 6, the San Francisco-based bank slashed its dividend 85 percent to 5 cents a share to preserve capital.

Wells Fargo shares fell 1 cent yesterday to $13.94 on the New York Stock Exchange. It has dropped 53 percent in the past year, compared with a 68 percent drop in the 24-stock KBW Bank Index.

To contact the reporters on this story: Ari Levy in San Francisco at alevy5@bloomberg.net; Vivien Lou Chen in San Francisco at vchen1@bloomberg.net

Last Updated: March 13, 2009 23:42 EDT