April 2 (Bloomberg) -- The Financial Accounting Standards Board, pressured by U.S. lawmakers and financial companies, voted to relax fair-value accounting rules that Citigroup Inc. and Wells Fargo & Co. say don’t work when markets are inactive.

Changes to fair-value, or mark-to-market accounting, approved by FASB today allow companies to use “significant” judgment in gauging prices of some investments on their books, including mortgage-backed securities. Analysts say the measure may reduce banks’ writedowns and boost net income. Firms could apply the changes to first-quarter results.

“Good decision,” Citigroup Chairman Richard Parsons said of FASB’s move. The market for mortgages and other assets was not working, so something had to change, Parsons said in a New York interview today. Citigroup later said in a statement the decision will have “no impact” on its financial statements.

House Financial Services Committee members pressed FASB Chairman Robert Herz at a March 12 hearing to revise fair-value, which requires banks to mark assets each quarter to reflect market prices, saying it unfairly punished financial companies. FASB’s proposals, made less than a week later, led to criticism from investor advocates and accounting-industry groups, which say the rules force firms to reveal their true financial health.

Financial shares rose after the FASB move. Citigroup rose 2.2 percent to $2.74 at 4:15 p.m. in New York Stock Exchange composite trading. Bank of America Corp. added 2.7 percent to $7.24. The KBW Bank Index earlier rose as much as 6.1 percent.

‘More Accurate’

“Today’s decision should improve information for investors by providing more accurate estimates of market values,” Edward Yingling, chief executive officer of the American Bankers Association, said in a statement.

Responding to investor complaints about its March proposal, FASB today increased the amount of information companies must give on how they value assets. In a related measure, the board voted to allow more flexibility in valuing so-called impaired securities. FASB decided to apply that proposal only for debt securities.

“We went through a full due process,” Herz told reporters after the board meeting. “It was accelerated and expedited. Not everyone is going to agree.”

The ABA in September joined Blackstone Group LP Chairman Stephen Schwarzman and 65 members of the U.S. House of Representatives to urge that FASB-mandated fair-value accounting be suspended. William Isaac, chairman of the Federal Deposit Insurance Corp. from 1981 to 1985, has called fair value “a major cause” of the credit crisis. Robert Rubin, the former Citigroup senior counselor and Treasury secretary, said Jan. 27 the rule has done “a great deal of damage.”

‘Long Overdue’

FASB’s vote was “long overdue,” Representative Spencer Bachus, the ranking Republican on the House Financial Services Committee, said in a statement today. “Financial institutions and community banks have been adversely affected by the rigid application of these rules during this financial crisis, causing further instability in the banking system.”

“I think we’ll see significant write-ups as a result of this,” boosting bank earnings, said Brian Wesbury, chief economist at First Trust Advisors LP in Lisle, Illinois. “It will put the banks back to where they would have been if the rule hadn’t been in place.”

The biggest remaining question is “whether auditors will agree with the judgment of the bank management,” Wesbury said in an interview.

Competitors’ Sales

Banks rely on competitors’ asset sales to help determine the fair-market value of similar securities they hold on their own books. FASB’s staff conceded the March 17 proposal led to a “presumption” that all security sales are “distressed” unless evidence proves otherwise. Such an interpretation might have let financial firms ignore transactions in valuing assets.

FASB staff said banks should only disregard transactions that aren’t “orderly,” including situations in which the “seller is near bankruptcy” or needed to sell the asset to comply with regulatory requirements. The staff said in a report today it was not FASB’s intent “to change the objective of a fair-value measurement.”

Fair-value “provides the kind of transparency essential to restoring public confidence in U.S. markets,” former Securities and Exchange Commission Chairman Arthur Levitt said in an interview yesterday.

Levitt is co-chairman, along with former SEC head William Donaldson, of the Investors’ Working Group, a non-partisan panel formed to recommend improvements to financial regulation.

“The group is deeply concerned about the apparent FASB succumbing to political pressures,” he said. Levitt is a senior adviser at buyout firm Carlyle Group and a board member at Bloomberg LP, the parent of Bloomberg News.

‘Not as Bleak’

“The changes themselves are not quite as robust I think as the market had hoped,” said Gary Townsend, a former bank analyst who is president of Hill-Townsend Capital LLC in Chevy Chase, Maryland. “The outlook for the financials is turning out to be not as bleak as some in the market had suggested. The likelihood of the nationalization of the banks seems to be close to zero. Overall there is reason is see some optimism with respect to the direction of bank stocks,” Townsend said in an interview.

FASB rejected requests from banks to let them apply the fair-value change to their year-end financial statements for 2008. While the new standard takes effect for earnings reports filed at the end of June, FASB said companies could apply it to their first-quarter financial statements.

To contact the reporter on this story: Ian Katz in Norwalk, Connecticut, at ikatz2@bloomberg.net.

Last Updated: April 2, 2009 17:21 EDT