The Mortgage Bankers Association (MBA) sent a letter yesterday to the Financial Accounting Standards Board (FASB), concerning proposed changes (download by clicking here) to derivatives instruments and hedging activities in the Generally Accepted Accounting Principles (GAAP) administered by the board.

FASB's Proposed Update would require all financial instruments to be carried at fair value in the balance sheet. Financial instruments for which the entity’s business strategy is to hold, for collection or payment of contractual cash flows, would be carried at fair value with any changes in fair value going to other comprehensive income.

The MBA countered that this will "unnecessarily increase the complexity in financial statements that would adversely impact preparers, users and regulators."

In regards to the proposed changes, the FASB states that it believes that the proposed amendments would achieve the objective of developing common fair value measurement, disclosure and the understandability of these requirements under GAAP. But the MBA has several issues with the use of fair value.

"Fair value is not the most relevant measurement for assets and liabilities for which the business strategy is to collect or pay contractual cash flows," the MBA wrote. The trade group adds that amortized cost is a better reflection of expected cash flows. "MBA especially disagrees with the notion of including in the fair value of an entity’s liabilities the change in the entity’s own creditworthiness through earnings."

Furthermore, the proposed valuation process is neither fair value nor amortized cost; something the MBA also objects to.

"MBA believes qualitative along with quantitative information is more user-friendly, which is why MBA believes the current balance sheet presentation along with robust footnote disclosures is preferable," the letter concludes.

The new guidance will be effective for fiscal years ending after December 15, 2010. FASB did not return requests to comment.

Write to Jacob Gaffney.

Earlier this month, Ambac Financial Group (ABK: 0.00 N/A) disclosed possible bankruptcy plans in a filing with the Securities and Exchange Commission, saying it’s “highly unlikely” its main operating unit – muni-bond insurer Ambac Assurance Corp. – “will be able to make dividend payments” to the parent company for the foreseeable future.

Now a group of hedge funds that hold residential mortgage-backed securities insured by Ambac filed a motion with the circuit court of Dane County, Wis., seeking to prevent any payments from the muni-bond insurance unit finding their way to the parent corporation.

The complaint alleges the insurance unit funneled more than $230 million in dividends back to the parent company and certain preferred shareholders in 2008 and 2009. At a time when the parent company's "financial condition was deteriorating precipitously, projected claims payments and loss impairments were mounting, and its liquid claims-paying resources were eroding," according to the complaint.

The complaint was filed Tuesday and seeks to recover this amount. The Wisconsin court is supervising the account into which more than $57 billion of policies insured by Ambac Assurance were transferred. Ambac owes $1.2 billion, including maturing principal of $122.2 million on senior notes due August 2011, and had just $56.7 million in cash, as of June 30.

The company said in the SEC filing that it expects to have enough cash to pay expenses and debt into the second quarter, but “no guarantee can be given” that it will be able to do as much. The economic crisis has devastated Ambac Assurance because it wrapped too many mortgage-backed securities that crumbled as housing prices steadily plummeted.

A phone call to Ambac wasn't returned prior to publication.

Write to Jason Philyaw.

The Securities and Exchange Commission today cautioned credit rating agencies about internal conduct and methods the firms use to determine the riskiness of financial products.

The SEC announcement stems from an inquiry by its enforcement division into whether Moody's Investors Service violated registration provisions or anti-fraud provisions of federal securities laws.

While the SEC declined to pursue a fraud enforcement action in this case, the commission notes that Dodd-Frank gives federal district courts jurisdiction over SEC enforcement actions that allege violations of the anti-fraud provisions of the securities laws.

The report also notes the Dodd-Frank Act amended the securities laws to require nationally recognized statistical rating organizations (NRSROs) to "establish, maintain, enforce, and document an effective internal control structure governing the implementation of and adherence to policies, procedures, and methodologies for determining credit ratings," according to a release from the SEC.

"Investors rely upon statements that NRSROs make in their applications and reports submitted to the commission, particularly those that describe how the NRSRO determines credit ratings," said Robert Khuzami, director of the SEC's division of enforcement. "It is crucial that NRSROs take steps to assure themselves of the accuracy of those statements and that they have in place sufficient internal controls over the procedures they use to determine credit ratings."

The SEC inquiry stems from allegations that a Moody's computer coding error improved, "by 1.5 to 3.5 notches," the credit ratings for certain debt obligation notes. "Nevertheless, shortly thereafter during a meeting in Europe, a Moody's rating committee voted against taking responsive rating action, in part because of concerns that doing so would negatively impact Moody's business reputation."

Write to Jacob Gaffney.